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How Stocks And Bonds Affect The Real Estate Market

The love triangle between stocks, bonds, and interest rates can make for strange bedfellows.

Mortgage rates dropped this week on good news from both the stock and bond market. Bulls and Bears represent the volatility of the stock market

As industry professionals, we tend to throw these phrases around without considering whether anyone really understands what we’re talking about. In all honesty, what does this have to do with whether you can afford a home or not?

Well, we’ll take this opportunity to explain why news from the financial marketplace can affect your home purchasing power. First, let’s get a few definitions out of the way:

Stock

Basically, a “stock” is an ownership share of a corporation. This means that a stockholder is investing into the corporation in hopes that they can profit from its success. Benefits can be received either through profit dividends, or by selling the stock as a tradable asset on the open market for a profit. Along with potential sizable profits, stocks also carry a significant investment risk.

Mortgage loans may be packaged as stock investments in the form of a tradable asset known as a Mortgage-Backed Security. Your loan may be sold to another mortgage lender who will package it with several others and sell them on the open market. Investors make their money through the returns on interest, or by selling them on the open market at a profit.

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STOCK MARKET TRIVIA: A “Bull” market refers to stocks rising, while a “Bear” market means the market is falling. This is based on an old saying that goes “The bull walks up the stairs, while the bear jumps out the window.”

Bond

A bond works differently from a stock. Instead of investing as a share of the potential profits, a bond is a form of debt. Imagine giving a loan to a friend in exchange for a promise of repayment plus interest, just like a lender. However, like the stock market, bonds are open to investors. However UNLIKE stocks, bonds are a safer investment with a guaranteed steady return. Bonds are especially used by government and municipal entities to raise money, but corporations may offer bonds as well. While bonds are considered safer than stocks, they still come with some risk, as issuers still have to make good on their payments.

How are stocks and bonds interconnected?

Historically, when the stock market takes a dive, investors flock to the bond market. When the stock market thrives, the bond market suffers some “attention deficit.” Last year we saw a nearly instant reaction in interest rates when nervous investors sold off their Mortgage-Backed Securities on the news that the Federal Reserve would reduce their monthly stimulus that has guaranteed some MBS investments. Mortgage rates rose a whole percentage point from their historic low of around 3 and a half percent.

We’ve seen an interesting phenomenon this week, in that both stocks AND bonds have held steady, creating a synergy which has helped to drop interest rates a few tenths of a point, closing at 4.34% on Friday, April 11th. Now, whether this phenomenon holds is yet to be seen.

That being said, this is why we regularly remind anyone on the fence about buying a home to take advantage of the market and lock in your rate as soon as possible. Call us at either of the numbers listed at the top of this page, or send us a message using the Quick Response form below.

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