Mortgage Rates vs. Unemployment


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

When it comes to making or saving money, everyone wants to be able to 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 a lower mortgage rate, assuming one actually takes the time to shop around or pay attention to the direction of rates.

And a low mortgage rate can easily eclipse the savings of other tedious money-saving tasks in one fell swoop, because the savings are realized month after month, and year after year.

The Economy Guides Mortgage Rates

  • Rates are mainly driven by the economy
  • Good news leads to higher rates
  • Bad news leads to 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, which was released this morning, revealed that nonfarm payroll employment increased by 88,000 jobs in March, well below the consensus estimate around 200,000.

Though that was a huge miss, the unemployment rate actually dipped slightly to 7.6% from 7.7%.

Unfortunately, that too was bad news if you dig into the numbers because the labor force shrank by 496,000 over the month, meaning the unemployment rate can dip even if the same number of jobs is held.

In fact, the labor participation rate fell to 63.3%, the lowest level since 1979.

The only sliver of good news in the report was that both the January and February numbers were revised up, so perhaps the March numbers could be too.

How the Employment Report Impacts Mortgage Rates

  • The jobs report can have a big impact
  • If the report is bad, rates may fall
  • If the report is good, rates may jump
  • Pay attention if floating your rate around the release date

The jobs report clearly didn’t bode well for the stock market, as slowing job creation equates to a less robust economy. And so after the report was released, stocks tanked in a hurry. The Dow Jones fell more than 100 points, though it has since pulled back some of those losses.

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

At the same time, investors fled the stock market and made their way for bonds. As a result, the bellwether 10-year bond yield dropped markedly.

The story here is pretty straightforward. Because the jobs report was much worse than expected, the economy is seen as weaker and investors sought shelter in “safer” bonds. With bond demand higher, prices increased and associated yields dropped.

When bond yields drop, mortgage rates tend to follow suit. The 10-year bond has steadily fallen all week, from a high of 1.86% on Tuesday to 1.68% today. A month ago it was as high as 2.05%.

If you look at mortgage rates this year, they’ve increased steadily up until last week when some shaky economic news began to surface, including the Cypriot bailout situation.

And now with this most recent jobs report, the uncertainty is beginning to take center stage again. Some are even fretting about another recession. Lots of good news dominated the airwaves for months, but now bad news gets its time to shine as well.

While it won’t be good for the economy and the overall “recovery,” it’s great news for those looking to lock in a mortgage rate for a purchase or a 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.

If you want to gauge the direction of mortgage rates based on unemployment, the simple rule is that bad news is 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 can easily get burned as well.

And remember, jobs are just one piece of the pie, especially nowadays with the Fed intervening so much to manipulate rates. In recent years, both unemployment and mortgage rates have fallen in tandem.

Read more: Are mortgage rates negotiable?

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