The Correlation Between Mortgage Rates & the Stock Market

Differences

Mortgage rates are tied to specific loans, and are decided by lenders, often on a case by case basis as lenders place borrowers in various categories of risk. The stock market, on the other hand, may or may not use rates to determine value, and fluctuates largely because of investor interest. The stock market is not directly controlled by a series of factors the way mortgage rates are, although it is influenced by many people.

Mortgage rates and the stock market also have several key similarities. While banks do decide interest rates for their loans, they are influenced by the same factors that shift the stock market, especially decisions made by the government. Mortgages have much of the same risk for lenders that stocks do for investors, which causes them to behave in similar ways when risk is involved. There are even mortgage backed securities that are used to trade mortgages on the market.

The federal reserve rate, or the rate at which the government lends out money (among other activities) impacts all banking activates, since banks use the rate they borrow money from the government to decide what rates to charge each other, and ultimately their customers. If the Federal Reserve Board drops their rate, banks will drop their rates as well. Customers will have more money to spend and will be able to afford larger loans. This makes it easier for customers to invest rather than spending all excess revenue on loans, so the stock market sees increased activity. This increased activity often leads to higher prices on stocks while mortgage rates are falling.

Higher mortgage rates can have a negative effect on the stock market. If banks decide to raise their rates (often in response to federal rate changes), then it becomes more difficult for buyers to get loans. Borrowers must pay higher monthly rates and will have less interest in investments. This slows the economy and causes stock market prices to drop.

While bank and federal rates are important, overall economic conditions are also important. The stock market can also influence banks. If there is increased activity on the stock market, then banks may raise their rates to make more of a profit, seeing the increased economic activity as a chance to capitalize on investors' success.