How to Tell Which Way Interest Rates Are Headed
Nobody knows when mortgage rates are going to rise or fall, or by how much. Not even housing economists, who often joke that if they could forecast movements in interest rates with any certainty, they’d be wealthy and living in the South Pacific.
But home buyers and homeowners interested in refinancing can watch a few of the same key economic indicators that the professionals follow to get an idea of where rates are headed.
Each month, economists examine dozens of indicators to forecast changes in loan rates. For example, David Lereah of the Mortgage Bankers Assn. says he watches no fewer than 28 indexes, government reports and other evidence that can influence rates.
Lereah and his colleagues scrutinize retail sales reports, the foreign trade deficit, housing starts and sales, durable-goods orders, industrial production, inventories, oil prices and changes in personal income, among other things.
Laymen don’t have to be so thorough. If you pay close attention to three or four of the most important economic measures, you’ll have about as good a sense as anyone about the direction of mortgage rates.
The first benchmark to watch is the yield on 10-year Treasury bonds.
Mortgage rates “trade off” 10-year Treasuries and “move pretty much in lock step” with them, said Lereah, who is the MBA’s chief economist. “When yields move up or down, mortgage rates tend to move right along with them.”
Keith Gumbinger of HSH Associates in Butler, N.J., a leading publisher of mortgage market information, believes that bond yields “have more to do with where mortgage rates will go than anything else.”
When yields go up on Wall Street, the rates you and I pay for a home loan go up, too. Conversely, when yields are down, loan rates tend to fall as well.
So a good time to lock in on a rate you’ve been quoted is when bond rates start to move higher. If bond yields start heading south, on the other hand, mortgage rates will follow, so you’d be better off waiting until they bottom out.
You usually have time to act, because loan rates don’t change instantaneously with the bond market. In fact, it’s usually several hours or maybe even a few days before lenders react at the retail level.
Typically, the rate investors pay for mortgages in the secondary market changes within seconds. But lenders don’t usually change their rates until the next day, or maybe not even until the end of the week if there is little competition.
All financial newspapers and some local ones report bond yields on a daily basis.
Perhaps the next most important barometer, at least nowadays, is the employment report, which is released by the Labor Department on the first Friday of every month. This is not the unemployment rate, which measures how many people are out of work and is widely reported in the media, but the employment rate, or the number of workers added to the non-farm payroll.
A Leading Indicator
About a decade ago, the nation’s money supply, or all the cash and bank deposits in the entire banking system, was the “king” of the indicators, Lereah said. Now the leading indicator is job formations, because in today’s strong economy, they are a portent of inflation.
To read this signal correctly, the economist advises, you must be aware of two things: The current state of the economy and the unemployment rate, or the number of people actively looking for work.
“If we were in a weak economy--say we were just coming out of a recession--strong employment figures would indicate that the economy is getting better and mortgage rates would be falling,” Lereah explained.
“Today, though, with the economy pressing dangerously against capacity--that is, full employment--a big number indicates that the economy is growing too quickly. This could drive up wages and prices--and ultimately inflation.”
What’s a big number? According to Rob Spellman, who heads the economic analysis team at the Washtenaw Mortgage Co. in Ann Arbor, Mich., anything below 200,000 is considered weak and is therefore good news for the mortgage market.
Conversely, said Spellman, who believes that job formations are currently the economic indicator with the single greatest chance of influencing mortgage rates, anything above that level is a harbinger of inflation.
There are other signs of inflation that are worth watching as well. One is the consumer price index, another is the producer price index and a third is the gross domestic product. The bond markets are sensitive to all three.
Reported religiously by the media, the consumer price index is the price of a basket of goods and services that consumers purchase every day. The gross domestic product, which is the total of what’s produced in the economy, is heavily reported too. But the producer price index, or the price paid by manufacturers for their raw materials, isn’t as widely reported.
All three are reported as rates. But what’s more important than the rates themselves are the directions in which they’re heading and whether any changes are expected.
Greenspan’s Words
Generally, if these measures of inflation are rising, rates will tend to follow, although not necessarily quickly. And if the increases are greater than expected, rates could rise that much more.
Finally, you should pay attention to the remarks of Alan Greenspan, chairman of the nation’s central bank, the Federal Reserve Board. The money markets weigh his words very carefully, and so should you. But don’t overreact. Generally, if the economic data support Greenspan’s concerns, the markets will have adjusted already.
Distributed by United Feature Syndicate.
