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As mortgage rates start to off their all-time lows, there will be ramifications for investors. These ramifications not only highlight the importance of maintaining a proper asset mix, but they show that what may have been popular as recently as last year may be on this year's black list; likewise, what might have been on last year's black list could very well be on this year's "gotta have it" list.
Although mortgage alone are not an isolation indicator of market sentiment for different asset classes, they will certainly illustrate the point that it makes better sense to take a contrarian view to investing than following the "popular" money midway, or two-thirds of the way into a market expansion.
To start, consider what rising rates tell us. With mortgages, rising rates suggest that there is greater demand for the available pool of mortgage funds. This means that rates rise because borrowers are willing to pay a little more for the money they need to purchase the home they want.
It also shows us that investors who make capital available for mortgage have two options. The first is that they can invest in mortgages or they can invest elsewhere for less or similar risk and obtain a lesser or similar rate of return. This alternative is probably bonds -- both bond and mortgage investments are considered fixed income investments.
To keep access to funds high, borrowers therefore need to compensate mortgage lenders a little more than their next best alternative. But borrowers would never do this if they could not afford to. That means that if there not enough borrowers, rates might become more attractive so as to entice borrowers into paying a lower rate for money they may not truly need.
In order for borrowers to pay a little more, they must earn a little more. This means that wages are typically stable or improving and the housing market is such that passing on an opportunity today may otherwise cost a lot more later. The borrower has little choice. But with job stability, why not borrow at a higher price.
Job stability will come with greater corporate profits. That means that the companies that employ these borrowers will have to start seeing greater profitability. Without that, nobody can be guaranteed a job, much less a paycheck.
This scenario tells us a few things. First, as rates rise, bond prices will start to drop in the name of competition. But as those bond drop in price and increase in rates, people need to be safe in their employment. Therefore and secondly, this tells us that corporate profits are increasing. When corporate profits increase, stock prices increase.
In a round-about way, rising mortgage rates suggest that fixed income assets will soon be out of favor. And with people willing to pay more for their credit, we are being told that corporate profits will start to rise, thereby pushing up equity prices and making the equity asset class the one that investors should own.
About this Author
Chris has more than 17 years of financial services experience. He currently manages a website that helps people with Odorous House Ants Problem at Getting Rid Ants .org.
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