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Mortgage Rates vs. Unemployment: Keep a Close Eye on the Jobs Report!


It’s time for another mortgage match-up: “Mortgage rates vs. unemployment.”

When it comes to making (or for our purposes saving) money, everyone probably wishes they could predict the future.

After all, if you know what’s coming next, there are plenty of great ways to capitalize.

For homeowners, good timing or a penchant for fortunetelling can result in buying a property at market bottom.

Or landing a lower mortgage rate, assuming one takes the time to shop around and gather multiple quotes from different lenders.

Ultimately, a low mortgage rate can easily eclipse the savings of other tedious money-saving tasks in one fell swoop.

Why?  Because the savings are realized month after month, and year after year, for potentially decades.

The Economy Guides Mortgage Rates

  • Mortgage interest rates are mainly driven by the state of the economy
  • Things like unemployment and new job creation can have a big impact
  • Good news = a growing economy and higher rates
  • Bad news = a stagnant/contracting economy and lower rates

While there are plenty of economic indicators that affect the direction of mortgage rates, perhaps the biggest is the monthly “Employment Situation” report, delivered by the Bureau of Labor Statistics (BLS) on the first Friday of each month.

It’s affectionately known as the “jobs report” or the “NFP,” which stands for nonfarm payrolls (it excludes farm workers, government employees, and some others).

The latest report released a few days ago revealed that nonfarm payroll employment increased by 943,000 jobs in July, well above the consensus estimate around 865,000.

At the same time, the unemployment rate declined 0.5% to 5.4%, again beating its estimate of 5.7%.

Additionally, job growth was also upwardly revised for both the month of May and June.

In other words, good news all around, except for the fact that millions of jobs have yet to return since being lost around the time COVID-19 took hold.

The bond market appeared to immediately take notice, with yields on the 10-year rising from around 1.18 to over 1.30 over the past couple days.

Tight vs. Loose Labor Market

Like homes, there is supply and demand in the labor market.

The labor market is considered “tight” when there are lots of job openings but few available workers. It is also characterized by low unemployment.

Simply put, it’s hard for employers to find workers when the labor market is tight.

This can lead to wage increases and subsequent inflation since employers may need to offer higher salaries to retain existing employees or woo new ones.

The labor market is considered “slack” or loose when there are more prospective workers than available job openings. Put another way, when labor supply exceeds demand.

This means more applicants are competing for fewer job openings, leading to higher unemployment.

If this is the case, wages can remain flat or even come down because employers don’t need to compete for talent, nor worry about retaining their existing workers.

It can lead to disinflation, where prices of goods and services rise at a slower pace.

How the Employment Report Impacts Mortgage Rates

  • The jobs report can have a big impact on interest rates
  • If the report is bad or worse than expected, rates may fall
  • If the report is good or better than consensus, rates may jump
  • Pay close attention if floating your rate around the release date (first Friday of every month)

The jobs report was a positive for the stock market, as increased job creation equates to a more robust economy.

After the report was released, the Dow Jones increased about 150 points, though it had gone up about 300 points the day before.

So perhaps the positive jobs report was already baked in, or was expected to be as good as it wound up being.

At the same time, investors fled the bond market, and as a result the bellwether 10-year bond yield dropped markedly to offset a lower price.

In case you were wondering, mortgage rates tend to follow stocks both up or down.

Use the Jobs Report to Predict Mortgage Rates

The story here is pretty straightforward.

Because the jobs report was better than expected, the economy is now seen as stronger and investors felt more inclined to take risk in the stock market.

Concurrently, investors left their haven in “safer” bonds, pushing both demand and prices lower, while forcing associated yields higher.

When 10-year bond yields rise, mortgage rates tend to follow suit.

The 10-year bond bottomed in early August around 1.15% and is now closer to 1.32% today.

If you look at 30-year fixed mortgage rates since last week, they’ve increased steadily and are now about .25% higher than they were.

So instead of being quoted 2.50%, which is an incredible rate by the way, the new quote might look like 2.75% instead, which is still super low.

The good news is rates probably didn’t move as much they could have because there’s still a ton of uncertainty in the air with regard to the resurgence of COVID-19.

You’ve got epidemiologists saying we’re still in the early innings of this pandemic, and economists claiming the recent inflation is temporary.

That’s enough to temper any major interest rate flare-ups related to the jobs report, though you do need to be careful not to get complacent.

If another good jobs report surfaces next month, there could be a lot more upward pressure on mortgage rates, especially if the government tapers mortgage purchases.

While a weak report next month won’t be good for the economy and the overall “recovery,” it would be great news for those looking to lock in a mortgage rate for a home purchase or a mortgage refinance.

They’ll get their hands on lower mortgage rates as investors shy away from stocks and instead invest in bonds and mortgage-backed securities (MBS).

Bad News Is Typically Good for Mortgage Rates

In summary, if you want to gauge the direction of mortgage rates based on unemployment data, the simple rule is that bad news is generally good for rates, and vice versa.

Good jobs report = higher mortgage rates
Bad jobs report = lower mortgage rates

Just be careful – a surprise in the report can go both ways, and those who choose to float their rate right before a jobs report release date can easily get burned.

Lastly, remember that jobs are just one piece of the pie when it comes to tracking mortgage rates.

This is especially true nowadays with the Fed intervening so much to manipulate rates.

In recent years, both unemployment and mortgage rates have fallen in tandem, so it’s by no means a perfect science.

Read more: Are mortgage rates negotiable?

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