Like prices on other commodities, adjustments to interest rates -- the price for credit (i.e., loans) -- are based on the rule of supply and demand, generally speaking. (Other factors influencing expectations about future prices also come into play. More from the source article...)
Generally, if the demand for credit increases, so would be the upward pressure on interest rates. This is because there are more buyers of credit (i.e., those of us seeking loans), so "sellers" (lenders, in this case) can command a better price, i.e. higher rates.
Similarly, if the demand for credit reduces, then pressure will be applied for interest rate reductions. In this case, there are more "sellers" than "buyers" (picture you and me having the luxury of time --unlike the last few years in this market -- to properly cater to the selection of our home loan while fending off lenders seeking enticements to get us to sign). In this environment buyers can command a lower better price, i.e. lower rates...
But wait, Mel. That doesn't square with the frenzy of the last year where interest rates remained low anyway...
And for that observation, you'd go to the front of the class. All other things being equal, the basic supply/demand rationale applies. But, as I said earlier, there are other factors that feed in to the final price set on loans.
Some of these include expectations of lenders about inflation, as well as expectations also about regulatory action designed to support the Fed's desired economic agendas. These expectations would actually go more to explaining the low rates we saw throughout last year despite a strong economy. Though supply and demand was still at play, all things weren't equal. In that world, despite the strong productivity, expectations about various economic drivers -- inflation being one of them -- remained low...
There's alot more that can be said about this. But, for basic details, the attached is a good primer.
Mortgage-Net : Why do mortgage rates change?
- mel
