How the Stock Market Affects Mortgage Rates and Purchase Trends

stock marketPrimarily it’s the inflation expectations that influence mortgage rates and the direction in which they move. In addition to that, stock market conditions too have huge impact on the mortgage rates and purchase trends.

Before we understand how stock market affects mortgage rates and purchase trends, we should first understand the mechanism that governs mortgage rates and commercial loans in NJ. MBS or mortgages backed bonds are what determines the mortgages rates. MBSs are basically bonds backed by interest which mortgage holders pay. Just like there are exchanges where stocks are bought and sold, bonds too have exchange markets where people trade in MBSs.

Conventionally, there is supposed to be an inverse relationship between mortgage rates and MBS prices. According to that relationship, mortgage rates drop when the price of mortgage backed bonds increases and vice versa.

To understand how stock market affects the mortgages rates, we need to understand how it impacts bond prices. Both bonds and stocks compete for attracting more investment. In simpler words, before finalizing the decision to invest his money, every investor has to decide whether investing in stocks is a better decision or investing in bonds. Although markets are loaded with countess investment vehicles, these two happen to be the major driving forces behind investment capital.

Stock investments promise better returns on investment, but at the same time they happen to be more volatile and prone to risks. On the other hand, bonds provide lower returns but carry lesser volatility and risk. That is the reason bonds are considered a safe investment option for investors who may be interested in selling their stock position.

Therefore, as a rule of thumb, if the stock market is going down, it means that investors are more readily selling stocks and shifting towards investing in bonds. This makes the bond prices and mortgage rates to go down. On the other hand, if the stock market is doing well it means that investors are selling bonds and shifting towards investing money in stock market. As a result, bond prices go down and mortgage rates go higher. Therefore, it may become difficult for investors to get commercial loans in NJ.

However, one should remember that a myriad factors influence these rates. Technical trading patterns and inflation rates are two major factors you should monitor. But, the stock market too tends to impact the mortgage rates.