"When certain economic news reports vary greatly from forecasts watch out for a sudden increase or decrease in interest rates"

What causes mortgage interest rates to change?

Interest rate movements are based on the simple rule of supply and demand. When there is more demand for credit (loans) lenders can command higher prices. When the demand for credit decreases so do interest rates. In an expanding economy there is more demand for credit, so rates move higher, whereas when the economy is slowing the demand for credit decreases and so do interest rates.

The basic concept:

Bad economic news equals lower interest rates

Good economic news equals higher interest rates

Inflation through a growing economy is the main factor driving interest rates. When the economy grows too strongly, the Federal Reserve increases interest rates to slow the economy down and reduce inflation. Inflation results from prices of goods and services increasing. When the economy is strong, there is more demand for goods and services, so the producers of those goods and services can increase prices. A strong economy therefore results in higher real estate prices, higher rents on apartments, higher mortgage rates, etc.

Mortgage rates tend to move in the same direction as interest rates. However, actual mortgage rates are also based on supply and demand for mortgages. The supply and demand equation for mortgage rates may be different from the supply and demand equation for interest rates. Therefore, mortgage rates may at times even trend down when the Federal Reserve raises interest rates or go up when the Fed lowers.

Mortgage rates are also linked to the movement of US Treasury Securities. When bond prices move up, interest rates move down and vice versa. Mortgage lenders factor in the movement of the US Treasury yields when pricing their mortgage rates. The US Treasury Bond positive yield curve, or inverted yield curve, has long been a key economic indicator, and many feel that the slope of the curve is a clue as to whether rates will be higher or lower in the future.

The short-term interest rate is roughly defined as the interest rate charged on U.S. Treasury securities that mature from one day to six months later. The Long term interest rate is broadly defined as the rate offered on U.S. Treasury securities that mature in ten to 30 years. Mortgage rates are largely determined by long term interest rates, most commonly identified as the ten-year U.S. Treasury bond rate.