Thursday, May 3, 2018

What Causes Mortgage Interest Rates to Increase?

Do you wonder what causes mortgage interest rates to increase and fall the way they do? The media and even mainstream economists tend to say that interest rates are increasing as an indicator of economic health. 

However, this isn’t absolute and there are definite flaws in the idea. It is clear than the media has no clue what causes mortgage interest rates to rise at all.

Economic Growth

Interest rates went up almost 40 points in one stretch, and that is being hailed as evidence of economic growth. That isn’t the case, though. Recently, Treasury bonds saw a rise in yield, and the effects that had have been noticed all around the board.

Mario Draghi is the head of ECB (European Central Bank). The ECB printed trillions of Euros hoping it would pacify the bond market. The Eurozone had been financially flustered, and this helped the situation. After Greece left the Euro, some were afraid that the Euro would suffer more. Investors sold their Treasury Bonds to buy back into the Euro.

Economic Knowledge

Despite what is called wise economic knowledge, the rise of sovereign bonds would cause their credit to decrease. It would also run the risk of inflation. However, interest rates aren’t going to be so affected by economic health as is being pushed by the media.

When you mix economic growth with a well thought out, responsible financial policy, inflation tends to be less of a problem and then mortgage loan interest rates will rise. However, this happens without causing nominal rates to rise. It essentially just gives a much higher rate of return.

Inflation Concerns

This is exactly what happened in the United States in the 80’s. The battle against inflation had finally been considered over, the economy was booming and the stock market was doing great. Nominal rates were falling, not rising.

This is the direct opposite of what is being said now. Now, we are being told that the rise in interest rates is due to our well groomed, thriving economy. Why then, was the economy doing so well then, and the interest rates were lower?

When the amount of money in circulation is drastically increase, inflation increases as well. With all of the extra money and credit, centralized banks give some cover to the government, allowing it to end up in enormous amounts of debt. Central banks control interest rates for only a small amount of time.

Despite what is being said by most of the mainstream media outlets, mortgage loan interest rates are largely controlled by the banks. Rather than the economy influencing interest rates, a more realistic scenario is the interest rates influencing the economy.

What the banks base their interest rates on, however, is influenced by the economy and the need for profit. So while the interest affect the economy, they are based in part on the economy that it influences. This is the way things work, economics is a crazy, confused mess of policies, strategic manipulation and risk that if not watched carefully, can and will take you by surprise.

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