February employment numbers beat expectations and momentarily distracted markets from surprisingly poor December and January employment returns.
Private payrolls added 175,000 jobs in February, which is below the 12-month average of 189,000, but still better than the drops in December (adjusted 84,000) and January (adjusted 129,000). The overall unemployment rate was unchanged at 6.7%.
Source: Bureau of Labor Statistics
With good (or at least less terrible) data on the U.S. economic front, and with the Russia-Ukraine conflict relatively unexploded (so far), mortgage rates made a significant jump to end the week.
Investors tend to look for safer places to put money in times of uncertainty or volatility. When outlook darkens, the U.S. bond market – seen as a stable, “safe haven” for investors – tends to improve.
The performance of the bond market – specifically mortgage-backed securities (MBS) – helps set mortgage rates. Mortgage rates are at their best when MBS prices are high and yields are low. Last week’s “good news” caused investors to look for higher-yielding places to put money. This bond “sell off” meant less demand, which resulted in lower bond prices and higher yields. Mortgage rates jumped.
The news also helped inform investor expectations about future Federal Reserve action. The Federal Open Market Committee – the Fed’s policy-making wing – implemented “quantitative easing” during to recession as a stimulus program to lower borrowing cost and promote employment growth.
At peak, QE called for $85 billion in bond purchases per month, including $40 billion in mortgage-backed securities. The large, guaranteed source of demand caused MBS bond prices to rise and yields to drop. The Fed’s program thus helped mortgage rates drop to record lows.
“Tapering” – or reduction – of QE has already lopped off $10 billion in MBS purchases per month. The FOMC will continue reducing the bond-buying program, but more poor unemployment news could have slowed the pace.
Dan Green, founder and author of “The Mortgage Reports” blog, estimated that mortgage rates jumped by about 0.5 discount points after the news. (You might know “discount points” as simply “points”. This is the price borrowers pay – or are refunded – for a rates).
In dollar amount, Green put the drop in purchasing power at 4%, which means that a borrower who qualified for a $100,000 loan now qualifies for a $96,000 loan.
Analysts estimate that the average 30-year fixed rate would be closer to 5.0% without its current stimulus package (link). Mortgage rates will rise as the Fed continues to taper QE, but this will happen slowly.
As for now, the 30-year fixed is still near the lower end of the historical spectrum (see chart to the right). Give us a call at 805.543.LOAN and set up a free pre qualification to see how much home you are able to afford.
Central Coast Lending is a California mortgage broker and direct lender based on the Central Coast of California in San Luis Obispo County. Call us today at 805.543.LOAN or email firstname.lastname@example.org to set up a free pre qualification. We are The Mortgage Experts: ask us anything!