Beholden To The Bondholder: How Bonds Affect The Housing Market
While there are many factors that affect mortgage rates, bonds tend to have the most influence.
To understand how potential homeowners can take advantage of the ebb and flow of the housing market, Benzinga researched historical bond investment and how it influenced the current housing outlook.
Mind The Macro Factors
Macro factors for potential homeowners to consider include inflation, overall economic growth, and the Federal Reserve’s (i.e. the Fed’s) decisions. Due to the elasticity of these factors, positive or negative movement of one influences the others.
Gross Domestic Product (GDP) and overall economic activity affect the general market. These indicators regulate inflation and employment rates. Positive cash flows result in greater consumer spending power and employment stability. As a result, interest rates inflate. However, too much inflation decreases consumer spending power and bruises companies’ profits. If inflation isn't monitored by the Fed, a recession may occur.
As the central bank of the United States, the Fed controls the overall money supply and the interest rate. The Fed has the power to alter banks’ borrowing rates. The rate set by the Fed affects the everyday consumer because banks lend money to people and small businesses based on borrowing rates offered by the Fed.
The Bottom Line About Bonds
Mortgage rates are directly influenced by the buying and selling of mortgage bonds. When there is less demand for bonds, yields rise, and, in turn, so do rates.
When the economy is strong, consumers tend to invest in the market, especially real estate. However, as stocks begin to drop, consumers tend to invest in mortgage bonds, which offer fixed rates. In an environment defined by unstable stock prices, the safety and security associated with fix-rate bonds appeal to consumers. The more bonds purchased, the lower the yields.
Housing acts as a major economic driver due to the large cash flows affiliated with it, and the Fed has the option of purchasing mortgage bonds to consequently affect mortgage interest rates. The more bonds purchased by the Fed, the lower the mortgage interest rates and vice versa. The Fed regulates the economy by buying and selling mortgage bonds, and the amount bought or sold depends on the economy’s stability. The more stable the economy, the fewer mortgage bonds the Fed purchases.
So far in 2016, the iShares Barclays 20+ Yr Treas.Bond (ETF) (NASDAQ: TLT) is up more than 14 percent.
The Miracle Of The Mortgage-Backed Security
Typically the length of a loan is capped at 30 years. If terms were long, banks would risk receiving too little regular positive cash flow to offer additional loans.
According to Detroit-based lender Quicken Loans, if lenders offered lengthier loans, “(the lender) would have to loan you (the consumer) the money and then wait a couple of decades to get enough money to make a mortgage loan to someone else. The cash flow issue means that not many people would own homes.”
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