The Relationship Between Stocks and Interest Rates

There is an obvious relationship between the movement of stocks and interest rates. When the economy is doing better, stocks should also improve. This same stronger economy increases inflationary pressures which causes interest rates to rise. In addition, when stocks are doing well, more investors put their money in the stock market as opposed to bonds. So, on days that stocks are doing well, interest rates are increasing which means that bonds are not doing so well.

Seems simple, right? Look over the past five years and it is not so simple. For the past five years stocks have done very well as rates have stayed low. What was the cause? The precipitous drop in the stock market during the recession was a factor as much of this bull market is a rebound. Rates have stayed so low during the tepid recovery because the recovery has not been strong enough and there have been no inflationary pressures. In other words, day-to-day you are likely to see stocks rise and an increase in rates, but sometimes long-term trends paint another picture.

Why is this important? Long-term trends don’t last forever. If the economic recovery heats up from here, we could see rates rise and perhaps stocks will get stronger or perhaps they will fall because investors believe higher rates will stall the recovery. Many think that the pop in rates we had late last year was a partial cause of a slower economy this year, especially with regard to real estate. So if you want to know what rates are doing, stocks are not the only factor. Watch economic reports such as the jobs data we have coming out this week. Full employment would translate into inflationary pressures. However, we are a long, long way away from full employment.

The Markets. Rates continued to move down in the latest week, though the drop this week was slight. Freddie Mac announced that for the week ending May 29, 30-year fixed rates decreased to 4.12% from 4.14% the week before. The average for 15-year loans fell to 3.21%. Adjustables were mixed but stable in the past week with the average for one-year adjustables falling slightly to 2.41% and five-year adjustables unchanged at 2.96%. A year ago 30-year fixed rates were at 3.81%. Attributed to Frank Nothaft, vice president and chief economist, Freddie Mac — “Rates on home loans eased a bit for the fifth consecutive week as reports that existing home sales are up 1.3 percent but not as much as expected. However, new home sales rose 6.4 percent in April to a seasonally adjusted annual rate of 433,000, which followed an upward revision of 11,000 units for the prior two months. Also, as the spring home buying season continues, we see stronger consumer confidence as house prices remain on the rise. The Conference Board reported that confidence among consumers rose in May after dipping in April. Meanwhile, the S&P/Case-Shiller® 20-city composite index rose 0.9 percent in March, above the consensus forecast.” Rates indicated do not include fees and points and are provided for evidence of trends only. They should not be used for comparison purposes.

Current Indices For Adjustable Rate Mortgages
Updated May 30, 2014

Daily Value Monthly Value
May 29 April
6-month Treasury Security 0.05% 0.05%
1-year Treasury Security 0.10% 0.11%
3-year Treasury Security 0.77% 0.88%
5-year Treasury Security 1.52% 1.70%
10-year Treasury Security 2.45% 2.71%
12-month LIBOR 0.550% (Apr)
12-month MTA 0.123% (Apr)
11th District Cost of Funds 0.701% (Mar)
Prime Rate 3.25%

First-time home buyers have been a sluggish segment of the housing market in recent years, but Barclays equity researcher Stephen Kim is betting on their return. Kim recently released a report, “The Return of the First-Time Buyer,” which outlines three reasons why he believes first-timers will soon be back. In fact, he’s betting that entry-level buying will be a key theme in homebuilding industry this year. Kim says that job growth is reaching an important threshold for improved household formation. “The cumulative number of jobs created over the past several years has now reached the point where each new job will drive greater household growth,” Kim writes. Also, Kim points to the loosening of credit, with more lenders showing willingness to lend to borrowers in the 600-700 FICO range. Kim also notes that buying a home is still about 20 percent cheaper than renting, and the affordability of housing will be an attraction for first-timers to enter sooner rather than later before rates and home prices rise more. However, Kim mentions there is one big hurdle first-time buyers will continue to face: Student loan debt. Source: Barclays and HousingWire

Properties sold faster in March — at a median of 55 days — due to low inventories of homes for sale nationwide, according to the latest Realtors® Confidence Index. The index is based on a survey of more than 3,800 Realtors® about their transactions in March. Short sales were on the market for the longest period of time — 112 days in March compared to 98 days in February. Foreclosed homes were on the market for 55 days. About 37 percent of real estate professionals report that properties sold in March had been on the market for less than a month. In February, 34 percent of practitioners reported the same. Buyer traffic was also up in March, although demand was softer than a year ago, according to the report. Still, Realtor® confidence about current market conditions ticked up in March, reflecting a typical seasonal increase. Their confidence about the outlook for the next six months also improved but is lower than what it was a year ago. The biggest concerns among Realtors® remain low levels of inventories, tight credit conditions, and uncertainty about flood insurance regulation, according to the Realtors ® Confidence Index. Realtors® continue to be confident that prices will increase over the next 12 months but at a “modest pace.” They expect prices to increase at a median of about 4 percent over the next 12 months. Source: NAR

After buyers move in to their new home, they should be prepared for some home fixes to present themselves each season, says Rich Escallier, a handyman in Chicago. “If you can go six months without finding something that raises your blood pressure, you’re lucky,” Escallier says. CBS MoneyWatch recently released a checklist of routine maintenance and small home repairs that home buyers should expect to do their first year to help avoid more costly problems from surfacing later on:

During move-in week: Turn on all major appliances and run them for a complete cycle. Even if the buyer already completed a home inspection, they should test again, experts say. After all, “if you have a minor leak under the dishwasher, that water leaks into the subfloor and you can’t see it,” says Daniel Cipriani with Kade Homes & Renovations in the Atlanta area. “But you’ll start to notice the hardwood floor buckling.”
45 days after move-in: Change the HVAC system filter and vacuum out the air intake vents. “Capturing dirt and dust with the right filter can go a long way toward preserving the new home appeal for a few years,” CBC MoneyWatch notes.
Six months after move-in: Inspect the exterior of your home in both the summer and fall to ensure rainwater is draining away from the home properly. Also, clean out clogged gutters and downspouts. “Landscaping should be negatively graded away from the house,” Cipriani says. “People don’t think it’s a big problem, but otherwise water pools against the foundation and doesn’t have anywhere to go.”
Every year: Inspect the home’s roof for any missing shingles and gaps around the chimneys. Also, check the ceilings inside the home for any water spots and indications of potential leaks.
Every two years: Hire a professional HVAC contractor to inspect their furnace, air conditioner, and hot water heater. A ruptured reservoir could potentially spill 40 gallons of water in a mere few hours so experts recommend home owners install a water alarm with sensors in the collection pan underneath the hot water heater. The sensors cost about $25 and can help save home owners from costly water damage. Source: CBS MoneyWatch

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