After the Labor Department announced the Jobs Numbers for October, there were quite a few surprises. And almost a guarantee the Fed will raise rates at their next round of meetings November 7-8. The last rate increase came at the September two-day FOMC meetings. Doing so would mark the fourth time the FOMC has voted to increase the Federal Funds rate. Why is another rate increase almost imminent? Let’s take a closer look at the Unemployment Numbers for October.
The headline number, the actual unemployment rate is what most analysts will first notice. The rate stayed at 3.7 percent, the same as the September figure and also the lowest since December of 1969. “Full employment” historically has been seen at 3.0 percent but in light of this new data, we could be getting closer to full employment if we’re not already there.
One bit of data that jumped out was the number of nonfarm payroll jobs which increased by 250,000. Most economics expected an increase but not anything near the 250,000 mark. The expectation was closer to 190,000, off by nearly 30%. Some information is not so obvious but still important. The number of those working hit a brand new record at 156.6 million workers. When compared to the adult population in general, this shows that 60.6 percent of the population is employed, the highest level in a decade.
But for the first time in several months, Wage Gains made some strides. The annual increase in wage gains rose by 3.1 percent, the best increase since 2009. But it’s this number that should almost guarantee a rate increase this month as well as another in early 2019.
One of the Fed’s primary concerns is to keep a lid on inflation. When things begin to cost more and buying power erodes, it’s like getting a pay cut. As an economy continues to improve, businesses can charge more for their products and services. When wage growth increases at current levels it puts more money in consumers’ wallets which can then encourage spending. More spending means greater demand for various goods and services which in turn can push companies to charge more. So far, inflation has been kept at bay and whether you give credit to the Federal Reserve or not, with the Fed’s job being to control the cost of funds and keep inflation in check, someone has to get the credit.
So, how will the next Fed move impact mortgage rates? If you have an adjustable rate mortgage tied to the Prime Rate, you’ll see an almost immediate bump. If the Fed raises the Fed Funds rate by 0.25%, the expected amount, the Prime Rate will rise by the same amount. Other mortgage rates are not tied directly to Fed moves but certainly in an indirect manner.
Fixed rates so far this year have been in a relatively tight range. Freddie Mac polls various mortgage companies across the country each week and report the average rate resulting from this poll. Freddie’s most recent poll reported the average 30 year fixed rate came in at 4.83%, a slight drop from the previous week’s average of 4.85%. One year ago, the average 30 year fixed rate came in at just under 4.00%.
It’s important to note these are averages and not what may be available today. Typically, the Freddie report is higher than what we can offer on any given business day.
When lenders set their interest rates for the day, they refer to a couple of mortgage bonds or mortgage-backed securities. For a conforming conventional loan, lenders tie their rates with to what is referred to as the FNMA 30yr 4.5 or the FHLMC 30yr 4.5 bond. The yield or the “rate” works in the opposite of a bonds prices. When the price of a bond goes up, rates go down and when bond prices go down, rates go up. Investors put more money into bonds in times of economic uncertainty as a safety net for their portfolios. When the economy points to a rose future, investors will sell bonds driving up rates.
In light the October jobs numbers we can anticipate more money being pulled from all types of bonds and securities and more into equities. Our economy is doing quite well, but the other side is that we should see higher rates in the future. If you’re thinking of buying and financing a home, contact us today to discuss all the latest options.
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