Mortgage rates rose decisively on news that the US economy created nearly 300,000 jobs in February. Some mortgage lenders are now charging rates 0.125% higher than they did yesterday, and the rest are charging more for the same rate.
Analysts expected only 230,000 new jobs last month. While that’s a respectable number, the actual count blew away expectations.
That’s good for the economy, but bad for mortgage rates.
Rates tend to rise on positive news. In a healthy economy, investors can get great returns in the stock market and other investments. Their appetite for relatively safe investments like mortgage backed securities, or MBS, wanes.
How Mortgage Backed Securities Swing Rates
Ever-changing MBS prices determine your mortgage rate. As investors sell MBS, the rates of return on those MBS must go up to entice other buyers. The higher the return on MBS, the higher your mortgage rate.
For instance, imagine you are looking for a savings account. One bank offers a 1% return, another bank offers 1.5%. You put your money in the account with the higher return. But then another bank offers 2%. The first two banks must increase their rates of return to entice you back.
Mortgage backed securities are basically savings accounts for investors. They are a relatively safe but low-return investment they use to “park” their assets while other higher return investments become available.
In a struggling economy, demand for MBS is high. Investors are willing to take a very low return – somewhere around 3% per year. But if the stock market and mutual funds are yielding 5-10% per year, investors pile out of MBS and into those higher return opportunities.
Just like bank #1 and 2 in the above example, MBS interest rates must rise to attract investor money. The rate of return on MBS is directly tied to your mortgage rate.
The Jobs Report has Huge Influence on Rates
Today is an example of how much influence the Nonfarm Payrolls report has on rates.
Nonfarm payrolls, also known as the employment situation report or simply the jobs report, is a barometer to the overall health of the economy. In theory, the more jobs created and the lower the unemployment rate, the better the economy is doing.
But looking at the numbers alone doesn’t always reveal the true state of the economy.
In January, the unemployment rate increased from 5.6% to 5.7%. On the surface, this is not a good sign. But the real reason for the bump is more people looking for work again.
The unemployment rate only takes into consideration people without a job and wanting one. In a bad economy, discouraged workers give up looking for work and therefore are not counted. In January, more folks entered the job market again, a good sign that things are improving. Yet the increased participation rate made the raw unemployment percentage look worse.
February saw a more accurate but still somewhat flawed unemployment rate of 5.5%. Fewer people were interested in finding work. That lowers unemployment, technically, but doesn’t prove the economy is doing well. The huge amount of added jobs was a positive sign and contributed to the 0.2% drop in unemployment last month.
Should Mortgage Consumers Lock Today?
Locking a loan is a little like gambling. Locking often eliminates opportunity to get a lower rate in the future. Not locking is arguably more dangerous as rates tend to rise suddenly and without warning.
Many consumers realize too late that they should have locked yesterday.
Still, locking on a bad day for rates, like today, often doesn’t pay off. Rates can settle back down very quickly going into the next week. Investors are quite well known for knee-jerk overreactions only to come back from the brink a day or two later.
That’s likely the scenario going forward. The US economy still isn’t firing on all cylinders, and more important, the world is a very turbulent place. International factors like Middle Easter and European events can swing rates as much or more than US economic health. A mortgage consumer could assume the world isn’t going to sort out its problems overnight and low rates will be available for some time.
Still, some just want to lock and be safe rather than sorry. This, too, is commendable.
Securing a Mortgage Rate
Locking in today or at a later date is the same process. Contact a reputable mortgage lender and get a free, no obligation quote, along with a full estimate of fees.
When satisfied with the rate and fee structure, a mortgage consumer can lock in a rate. It often takes just minutes.