How Does A Stock Market Drop Affect Mortgage Rates

How Does A Stock Market Drop Affect Mortgage Rates?

In case you didn’t notice, the stock market has taken a bit of a dip. It’s gone down a little bit, and I want to talk about how stock market drops affect mortgage rates. Now, if you have investments in the stock market, and you’re worried about this, if you look back on the past month or so, we really just returned to the same levels as we had a couple weeks ago, so it’s not a gigantic dip in the scheme of things, but it’s definitely something to watch moving forward if we get further declines in the stock market.

So let’s go on to talk about how this affects mortgage rates.

Stocks are viewed typically as a more risky investment. They’re more volatile, they go up and down more, they change more from day to day, as we saw in the last week’s activity. When there’s fear in the market, when people fear that something maybe bad has happened in the economy or there’s some kind of risk in the stock market, they tend to pull money out of stocks, which causes the stock market to go down. So that money that they pull out of stocks that has to go somewhere. And typically people put that money into more safe investments, like investments that have fixed rate of returns like bonds, like treasury bonds, like mortgage backed securities, things that are very stable and have proven rates of return.

We typically see on stock market drops is people pull money out of stocks and they’re putting it into these safe investments, which when there’s more demand and more money going into bonds, it causes mortgage rates typically to go down. Now, this doesn’t always necessarily happen, and over the past week with this stock market dip, we actually didn’t see this happen, people were not putting money into mortgage backed securities at the high level that we would expect to see with the stock market dropped. So that tells me that a lot of people were taking money out of the stock market and basically putting it in cash, which is of course the safest investment you can possibly have because it sits there and earns a very low rate of return, but perhaps people were putting it in cash to wait for other opportunities or whatever the case may be.

The net effect over the past week is that mortgage rates, they did not improve like we normally see when the stock market goes down significantly like this. And we’re continuing a very good level on rates, rates are still very low, but not different from this time last week, unchanged from this time last week. So I hope that helps explain what to watch out for when the stock market drops, not always an exact correlation, but a lot of times a stock market drop can lead to lower interest rates.