Economic strength lifts mortgage rates

November 20th, 2013

On the stock market, the reaction was ambiguous. For mortgage rates, however, the reaction was clear, sharp, and immediate. That reaction entailed a rise in mortgage rates big enough to warrant revisiting your assumptions on a mortgage calculator. The catalyst was a spate of unexpectedly good economic news at the end of last week.                           

Economy shows resilience

On consecutive days in early November, it was reported that the economy grew at a faster rate in the third quarter than for any quarter in the past year, and that the pace of jobs growth had accelerated during October.

In an economy that has been starved for good news, those announcements would have been noteworthy in any case, but they were especially significant in the context of concern over what impact October's federal government shutdown might have had. It appears that the economy was surprisingly resilient.

Mortgage payment calculators can count the cost

Strangely, the stock market reacted to this evidence of stronger growth in a contradictory way. On the day of the GDP report, stocks dropped sharply, but when the strong employment report was released the very next day, the stock market rose significantly, essentially making back the losses from the day before.

The stock market is torn because on the one hand, a stronger economy might prompt the Federal Reserve to begin tapering off its policy of keeping interest rates low. Those low interest rates have been instrumental in boosting stock values. On the other hand, if a stronger economy boosts corporate earnings, it can compensate for higher interest rates and make stocks more valuable in the long run.

For mortgage rates, there was no such ambiguity. A stronger economy almost certainly means higher interest rates, and 30-year mortgage rates rose by 19 basis points in the week following the GDP announcement, reaching their highest level since mid-September.

A 19-basis-point increase is enough to make it worthwhile for would-be home buyers to go back to their mortgage payment calculators and see how their monthly payments would be affected. Similarly, people looking to refinance should consult a refinance calculator and see if a new loan still makes sense at today's higher rates.

Meanwhile, with the holiday shopping season coming up, expect a steady flow of economic news to further shake up mortgage rates.

Posted By :

Richard Barrington has earned the CFA designation and is a 20-year veteran of the financial industry, including having previously served for over a dozen years as a member of the Executive Committee of Manning & Napier Advisors, Inc. Richard has written extensively on investment and personal finance topics.

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