What's next for mortgage rates? Ask the stock market

June 07th, 2013

Mortgage rates began the month of June by rising for the fifth consecutive week. Will this upward march continue? It may be worth looking at a recent wobble in the stock market for signs of what could throw rising rates off track -- or drive them even higher.

A significant jump in mortgage rates

In rising for five straight weeks, 30-year mortgage rates increased by 56 basis points, according to mortgage finance company Freddie Mac. You probably don't need a mortgage calculator to tell you that is a significant increase, but you probably should use a mortgage calculator to figure out just how big an impact it has had on your mortgage plans.

In addition, you might want to map out a variety of possibilities on a loan calculator, from higher rates to lower rates, because further changes in mortgage rates could well be on the way.

What does the stock market's trouble mean for mortgage rates?

The economic context for the rise in mortgage rates over the past several weeks has been that the recovery is gathering momentum. The stock market was the first to embrace this optimism, with a strong rise through the first five months of the year. Lately though, the market rally has faltered badly, with the Dow Jones Industrial Average falling by more than 400 points from May 28 to June 5.

There have been two primary explanations advanced for the stock market's troubles -- explanations which are largely contradictory and thus would have very different implications for mortgage rates:

  1. One explanation is that the most recent evidence, including a disappointing report on manufacturing activity, suggests that the economic recovery may be losing steam.
  2. Another explanation is that the strength of the economy is so convincing that the Federal Reserve may soon end its intervention in the bond market. That intervention has been instrumental in keeping interest rates low.

Under the first scenario, another sag in the economy would probably cool off the rise in mortgage rates. However, under the second scenario, a combination of economic strength and an end to the Fed's intervention could spur mortgage rates even higher.

It's still unclear what is truly behind the stock market's recent setbacks, but the answer will have a great deal to do with the near-term direction of 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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