How Herd Mentality Determines The Direction Of Mortgage Rates

If there's one thing that drives mortgage markets batty, it's uncertainty. 

When the economy is an undecided issue, investors don't know how to place their bets and it leads to volatility.

One day, the markets lean to the left.  The next day, they lean to the right.  There's no real reason why it happens -- it's all on "gut feel".

Psychology of this nature is highly susceptible to Herd Mentality.  It's part of the markets and we've all come to accept it. 

When traders use that sixth sense, it creates an unstable mortgage rate environment because there's no conviction that drives buying and selling behavior -- it's all just following "the crowd".

And right now, because "the crowd" is betting against the economy, mortgage rates fell last week.

Meanwhile -- without hard data to fall back on -- a very heated debate has emerged among market players.

The long-standing market bulls believe that inflation is out-of-control and that the economy is a runaway train.  Their evidence is rising energy costs and the continued growth in GDP.

The long-standing market bears believe that we're in the midst of a recession. Their evidence is rising unemployment, weakening spending, and shrinking access to credit markets.

Everyone else is just playing the field -- bouncing from camp to camp and taking mortgage rates with them.  When they pile into the "bull" camp, rates go up; into the "bear" camp, rates go down.

This week, a bevy of economic data from December will be released and it should become much more clear which side is right. 

That may be unfortunate for mortgage rate shoppers.

With even a whiff that the economy is not slowing as much as last week's news would have us expect, it will lead to large mortgage rate movements to the upside. 

That's because most bets are with "recession" right now and those bets will change as the direction of herd changes.

With so much data due this week, though, it should help to add some certainty to the markets and shape an answer to the question:

Who is going to win?  The Bulls or the Bears?

Because it takes up to 9 months for economic changes to work their way through the economy, we won't know for sure until later this year -- unless, of course, Ditka is in the market. 

In that case, it's Da Bearsss.

(Image courtesy: AllPosters.com, Bottom Bus)