November Jobs Number Surprise: Results in Interest Rates Rising

Friday morning Nov 8th rolled in with the pundits on CNBC calling for a jobs creation number between 100k to 140k. I routinely switch off Mickey Mouse Clubhouse once a month on that particular Friday to the dismay of my 2 year old daughter to see how the reported number could impact my clients' rates. The past few months, the experts on the CNBC panel were often incorrect. They've had a much rosier picture of the economy than what I was seeing from daily economic reports. Thus, since August, mortgage rates had been improving from the mid to upper 4% range to the 4% to mid 4% range depending on the loan program for a 30 year fixed rate mortgage.

I was much more interested in Friday's number than normal, nervous would accurately describe it as my stomach was upset---a bad gut feeling. My concern was not if the jobs created for the month of October were less than the consensus of 120k (which would likely result in mortgage rates improving) but "what if this number surprises everyone and shows more improvement than anyone is talking about"?

I had a vested interest as several clients the day before told me they no longer wanted to wait to lock in their rate but were not sure they had done the right thing. I then had a few "gamblers" defined as those who felt the jobs report would disappoint...thus rates would go down further. So what happened next?

I am sitting on my couch, iphone at the ready showing Mortgage Market Guide Mobile via Google Chrome...and see Bonds are down 19 basis points (nearly a quarter discount point). Bond traders like to sell bonds thus driving down prices (and rate increases) when they don't know what a report like this will do to the overall fixed income market. But 19 basis points??? Ahhh, a bad jobs number will erase that in one trade so I am not concerned. What does have my palms sweating is Hampton Pearson...he's the poster boy for delivering us the good news every month from outside the Labor Department. CNBC comes back from commercial, the music fades in, the media over-used term Breaking News appears and...

204k jobs created...with upward revisions to previous months numbers. I flip my phone in the air and look at my wife and say "Rates are going to tank!" I hold up my phone and continue to hit refresh...but bonds stay at -19 bps. I get excited as maybe there is more to the report than the headline number (which is always the case). But then it happens...bonds drop to -55, then -75, then -95 over the next 30 minutes. They settle in at -116 bps for the 3.5% Fannie Mae Mortgage Backed Security Coupon. That just means rates got over a discount point worse in about an hour. But what does that mean?

On Thursday, my client wanted a 4.25% rate (and had been waiting to lock for 2 weeks) but rates were sitting at 4.375% which included a lender credit (Ruoff paying their closings costs and prepaid items) to the tune of $2600. Their loan amount was $380,000. A discount point is 1% of the loan amount or $3800. Had they not locked, on Friday to get that 4.375% rate they would have had to pay money (nearly $1500), not receive a credit back at closing. For them, locking in the rate on Thursday saved them over $4000.

This was a big deal to a lot of my clients...we protected them from higher rates. What about those getting ready to buy later this month and closing in December or January? Remember I mentioned there is often more to a jobs report that is not a part of the headline number? The jobs report reflected over 700,000 have given up looking for jobs. This is called the labor force participation rate...people actively looking for jobs vs. those who have given up their quest for employment. Our participation rate for the US is at the worst number seen since 1978 (below).

What I feel this statistic shows is that our jobs market is far from out of the woods. Just because you create 204k jobs when 300k-400k (the commonly accepted number from the economists) is the target number needed to continue the economic recovery, there is no reason to celebrate. And certainly no reason to have rates rise. Couple that with 700k people exiting the workforce --- just do the math and you see our labor force is still shrinking! But you see these knee jerk reactions occur when a certain data point is heavily focused on and scrutinized---like the monthly jobs report.

So for those of you not locked in on a rate, expect rates to hover in the range of the lower 4 range to upper 4 range over the next few months. And if you catch a day where rates drop as a result of a report like last Friday...LOCK IT IN. There is too much uncertainty and volatility in the market these days to speculate or think rates are going back to the 3% range. And if rates do go back down later, I always give my clients the option of refinancing at no cost. So lock it, and hope rates go down later and we can always take advantage of them when they do. Have a great week!