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Why bad news can be good for mortgages

1) Big money managers, in search of higher returns, avoid holding onto cash by investing in both stocks and bonds, and

2) Mortgage rates are based on the performance of mortgage-backed securities, a type of bond. This means that whenever the economy is on fire and there are good economic reports along with positive economic news, investors tend to put more money into stocks, which are more risky but generally offer higher returns. To do this, however, investors must remove some of their money from less-risky bonds. This decreased demand in bonds causes bond prices to worsen, which causes home loan rates to increase.

Inversely, when the economy is sluggish and economic reports and news are negative, money managers tend to remove money from higher-risk stocks and put it into less-risky bonds. As demand for bonds increases, bond pricing improves and home loan rates decrease.