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Employment Data Surprises. Are Mortgage Rates Headed Higher?

Mortgage rates inched higher during the week as stronger than expected housing and employment data, along with an improved outlook from the Fed, increased concerns about future inflationary pressures. Pending Home Sales increased for the ninth straight month, to the highest level since March 2006. The index is up nearly 32% from last year, the largest annual increase ever. The Labor Department said the US lost only 11,000 jobs in November, the fewest since the recession began, and far lower than the 125,000 expected. And figures from the prior two months were also revised lower by 159,000. The Unemployment Rate also unexpectedly dropped to 10% from 10.2% last month. According to the Fed Beige Book survey of business conditions, eight of twelve regions “indicated some pick up in activity or improvement in conditions.” Currently, the 30 Year Fixed sits at 4.500% (4.679% APR) and the 15 Year Fixed is at 4.000% (4.307% APR). This week will be very light with news consisting of Retail Sales and $74 billion Treasury auctions.

Please do not get too excited by Friday’s market reaction. Don’t get us wrong, improvement in monthly employment data is definitely a welcome sight and one of the keys to an economic recovery, however, the employment front is still very grim. The US continues to lose jobs in manufacturing and construction. Even though the Unemployment Rate dropped to 10%, the “Under-Employment” Rate remains closer to 20%. Economic reports like the Beige Book indicate overall weakness in labor markets, and commercial real estate continues to be a looming cloud. Today, Fed Chairman Ben Bernanke said the US faces “formidable headwinds that seem likely to keep the pace of expansion moderate,” including a weak labor market and tight credit. Bernanke repeated the current Fed statement that interest rates are likely to remain low for an “extended period”. The employment outlook is not expected to improve until 2011 or later, with the Unemployment Rate peaking in middle 2010 at around 10.5%.

As for mortgage rates, don’t expect much change from the record lows we are currently enjoying. Just as we have seen for the past several months, 30 Year Fixed mortgage rates will continue to hover in a range from about 4.500% to 5.000%, with day-to-day volatility. The Fed must be careful to not raise interest rates prematurely and stifle an already weak economy, sending it further into recession. We continue to watch the Spring expiration of the Fed’s MBS purchase program as a major influence on the future direction of mortgage rates.

Central Coast Lending, Inc.
(805) 771-9870

Written by Keith Byrd - Go to Keith's Website/Profile