Falling mortgage rates: How the stock market is bringing holidays gifts to borrowers

Gina Pogol
The Mortgage Reports contributor

Not all doom and gloom despite stock market losses

Recently, concerns about the US and world economies has shaken up investors — both individual and institutional. If you’ve seen your investments falling, you may be feeling a little poorer than you were a few weeks ago. But there is a massive silver lining when stocks drop, especially as they have in the latter stages of 2018. It is falling mortgage rates.

Check out today's lower rates here. (Dec 12th, 2019)

Falling stocks mean lower rates

Why would stock market losses be good news for mortgage borrowers? Because they cause investors to panic and sell. And where are the going to move the money they get from selling their stocks? (Hint: it usually isn’t the mattress.) They may choose to cash out and wait, while their money earns about .5 percent in a checking account.

They may purchase Certificates of Deposit (CDs), which as of this writing are paying on average about .75 percent for a 3 month commitment and up to 3 percent for a 10 year commitment. So depositories are pulling in tons of money and paying almost nothing for it. Which means they can lend it out for less and still earn a profit.

Higher bond prices also mean lower rates

The second thing that often occurs is a so-called “flight to quality.” Investors at home and overseas care less about earning huge profits on their investments and retreat into a position of just trying not to lose it. So when they get worried about stocks, their money comes out of stocks and into guaranteed investments like US Treasuries.

A few years ago, several European countries went through a period of deflation. Instead of banks paying depositors money, they returned less to depositors. The longer depositors’  money was left in the bank, the less it became worth. So these investors pulled money out of their home countries and bought US Treasuries. Even the tiny rates these things were paying was better than the negative  interest these investors were being charged.

Mortgage-backed securities, or MBS, have similar low risk, because most of them are backed by government-controlled entities like Fannie Mae and Freddie Mac. So they are also popular when the economy gets shaky.

Overseas and domestic investors can cause falling mortgage rates for US real estate investment.

How do higher bond prices cause falling mortgage mortgage rates?

It’s just math. Treasuries are issued at so-called “par” pricing in $1,000 increments. So you might buy a bond paying 3 percent interest, or $30, for $1,000.  $30 a year divided by $1,000 = .03, or 3 percent.

But if events make investors and institutions concerned about protecting their principal, they may sell their stocks and want to buy your bond instead. And when money people want the same thing, you can charge a higher price for it. So you sell your $1,000 bond paying $30 a year for $1,200.

But the interest rate changes. Because the new owner still receives $30 a year, but he or she paid $1,200. Amd $30 / $1,200 equals 2.08 percent. The higher the price, the lower the interest rate.

Stock prices won’t stay low forever — but your mortgage may can

Unless the companies behind the stocks you buy go completely under, the chances are good that they will bounce back, and their prices will rise. But while they are down, you can grab a fixed -rate mortgage and lock in a low rate for the entire time in which you own your home.

So when (happy day!) your stock portfolios recover their former glory, your mortgage rate can still be a bargain. Because a fixed mortgage rate cannot increase.

Rates are falling. Check out today's deals now. (Dec 12th, 2019)