This seems like such a simple thing.  After all there has to be some way to predict what’s going to happen?!  If you read the newspaper, listen to the radio or watch TV there is always someone telling you that rates are going up or down.  So what’s the secret?  Well, there really isn’t any secret, and the fact is nobody can really predict mortgage interest rates – especially fixed rate mortgage loans.  To understand why this is you need to understand two things: just how rates are determined, and what causes them to change.

 What determines mortgage interest rates?  It’s probably not what you think.  The most common misconception is that the Federal Reserve (Fed) somehow sets rates; the fact is the Federal Reserve has absolutely no direct control over mortgage rates.  What the Fed does is set the rate that banks pay for overnight borrowing, and just how much money they have to keep on hand.  In this way the Fed DOES have a lot to do with the rate you pay on your business loan, your car loan, your credit card, your equity line, etc.  This money comes out of the bank’s vault – your deposits.  This is not where the money comes from for your 30-year fixed rate real estate loan.   Mortgage loans are sold as long-term investments (called Mortgage Backed Securities) in the “Bond Market.”  Because of this, mortgage rates will more closely follow what other long-term investments do – like treasury notes and long-term corporate debt.  In fact if you have a balanced 401(k) or IRA that is invested in both stock and bonds, you probably invested is someone’s mortgage – maybe even your own!

So what makes the bond market change?  The real answer is just about everything has some effect on the investment market.  The market takes everything into account and the buyers and sellers through the market determine the price – and by extension, the rates.  A long time ago in one of my business classes, my professor explained it to me this way:  Only three things determine the market price (rates) 1) What we know, 2) What we think we know, and 3) How we feel.

What we know:  One of the great things about living in these times is that we have an almost unlimited amount of information.  Everything from official government statistics, like the unemployment rate, the GDP, etc. to surveys conducted by major universities are literally at our fingertips.  Investors use this information along with thousands of other pieces of information to determine if they are going to buy stocks, buy bonds, sell stocks, sell bonds or do any combination thereof.

What we think we know: In addition to all of the information at our fingertips, investors also have an idea of what is going on now.  This is what economists do – predict what the new figures will be.

How we feel:  Despite what you may hear, investors are people – even the ones that control massive amounts of money.  The market often does things that cannot be explained by the pure economic numbers.  When the market is in a bullish mood, it is very capable of ignoring bad signals and surging ahead.  Conversely when it’s in a bearish mood the best news can often be ignored.

OK, so what makes the market change?  Simply put: new information.  This is why bad news will cause good results, and visa-versa.  If the bad news is not as bad as “the experts” thought it was going to be, the market will usually react positively.  At the same time if the good news is not as good as everybody thought it would be, it can have a negative effect?  A great example of this is when the Fed lowers its rates, and mortgage rates go up.  What happens is the Fed’s action may make investors sell their bonds and buy stocks – action which almost always causes mortgage interest rates to go up.  It also could be that the “experts were predicting a bigger drop in the rates”, so the market actually saw their action as a rate increase over what was expected.

So… how do I predict what rates are going to do?  It’s really very simple:  You can do a better job of interpreting the known information than the people who make millions of dollars because of their ability to interpret the data.  Or, you can do a better job of predicting what the new information will be.  Or, you can be more attuned to the mood of the market then the people who control billions of dollars worth of investments.  Hey I said it was simple, not easy.

The truth is that the really smart people – the ones who make millions of dollars because of their ability to out-think the market – are only about 2-3% better than a straight-up guess.  If you read, hear, or see someone’s’ prediction, chances are two things are true: 1) they are probably not in that select group that can out-think the market – and if they are, they are not telling what they really think; and 2) they are probably predicting that whatever the market just did, that it will continue in that direction.