Falling Wages Help Mortgage Rates
Mortgage rates are poised to move lower after release of the November Non-Farm Payrolls report.
Wage growth was negative, alleviating inflation concerns sparked after October’s report.
Last month, average hourly wages grew by an unexpected 0.4% — only the fourth time that’s happened in the past two years.
Fear of wage-push inflation pushed up rates. This month, the jobs report is forcing rates back down.
Wages fell by -0.1%, the biggest one-month drop since December 2014. Inflation fears have faded, at least for now.
Mortgage rates are dropping on the news.
Looking for the right time to start a home purchase or refinance? That time could be now.
Click to see today’s rates (Dec 2nd, 2016)
The Effect Of The Jobs Report
On the first Friday of each month, the Bureau of Labor Statistics releases its Non-Farm Payrolls report.
More commonly known as “the jobs report”, Non-Farm Payrolls gives a detailed look at the nation’s workforce. The report includes jobs by sector, average earnings, and the national unemployment rate.
The Non-Farm Payrolls report is among each month’s most closely-watched economic releases because so much of the U.S. economy is tied to jobs.
When the labor force is expanding and average wage earnings increase, the economy tends to expand.
As more income is earned by U.S. households, more taxes are paid to federal, state, and local governments. This leads to the purchase of more goods and services by both consumers and governments, which keeps the cycle going.
A strengthening jobs economy also increases the disposable income available in the typical U.S. household, which can boost consumer confidence and personal consumption. This, too, promotes a cycle of strong growth.
Growth begets growth.
Conversely, when job growth is low and confidence is down, consumption tends to drop. In markets like this, less income is earned, fewer taxes are paid, and demand for goods and services falls.
In down markets, businesses have fewer reasons to hire new workers, and they often reduce the size of their existing workforce to something smaller.
This cycle, too, feeds on itself.
Because of the importance of jobs to the broader U.S. economy, economists watch the Non-Farm Payrolls report closely.
Wall Street watches it, too, which is why “jobs” affect your mortgage rate.
Click to see today’s rates (Dec 2nd, 2016)
November Non-Farm Payrolls Report Shows Wages Up “Just” 2.5%
The November Non-Farm Payrolls report showed 178,000 net new jobs created last month — higher than the consensus estimate of one hundred seventy thousand jobs.
September and October Non-Farm Payrolls data was revised lower by a total of two thousand jobs.
Average hourly wages were up in November, raising the annual increase in wages to 2.5%. However, this is one of the lower readings of the year, and down from 2.8% growth the month prior.
The data puts Wall Street on notice, and the Federal Reserve is no doubt at attention, too.
Remember that the job of the Federal Reserve is to maximize the U.S. labor market while maintaining stable prices throughout the economy. Since the start of the decade, 14.9 million jobs have been created and now wage growth is returning, despite this month’s weakness.
Lower wage growth in November may not be enough to keep the Fed from raising rates at its December meeting.
Click to see today’s rates (Dec 2nd, 2016)
Lower Average Wages Help Mortgage Rates
Between December 2008 and December 2015, the Federal Reserve held the Fed Funds Rate in a target range near zero percent as a way to catalyze the U.S. economy.
Then, at the end of 2015, the group voted to raise the Fed Funds Rate to a target range near 0.25 percent, noting that future rate hikes were likely so long as economic conditions warranted them.
The November 2016 Non-Farm Payrolls report, while not especially strong, doesn’t lower the chances of a Federal Funds Rate increase in December.
Analysts propose a 90%-plus chance the Fed will hike rates at its last meeting of the year, adjourning at 2:00 PM ET on December 14.
The good news, though, is that mortgage rates are responding positively to November’s jobs report.
Wages actually shrank — something that hasn’t happened in 23 months. Mortgage rates drop during periods of anemic wage growth.
It’s all about inflation.
When wages rise, companies pass those costs to consumers by upping prices on goods and services. Consumers must pay more for the same things — the very definition of inflation.
As consumer expenses rise, companies and government agencies often increase wages again, and the cycle continues.
So, why is that bad for mortgage rates?
Simply put, investors shy away from investments whose value drops over time. They would rather acquire assets that increase in worth.
Mortgage-backed securities — the assets upon which mortgage rates are “made” — drop in value as inflation creeps up. For instance, an asset worth $100 today could be worth ninety-five inflation-adjusted dollars next year.
To make up for that loss, investors require higher interest rates to compensate for inflation, and then some.
Ideally — to an investor anyway — the rate of return always outstrips inflation. As inflation rises, so does the interest rate on any asset they agree to buy.
Hence, increasing inflation means higher mortgage rates for you.
The best course of action, then, is to lock in a mortgage rate while inflation concerns are low. As the economy heats up in 2017, unemployment could fall, wages could rise, and inflation could become a real factor within the economy.
The best mortgage rates may be the ones you find right now.
What Are Today’s Mortgage Rates?
The Non-Farm Payrolls report shows steady economic growth and a solid jobs economy. Eventually, this will affect mortgage rates negatively. For now, rate increases remain subdued.
Take a look at today’s real mortgage rates now. Your social security number is not required to get started, and all quotes come with instant access to your live credit scores.
Click to see today’s rates (Dec 2nd, 2016)
The information contained on The Mortgage Reports website is for informational purposes only and is not an advertisement for products offered by Full Beaker. The views and opinions expressed herein are those of the author and do not reflect the policy or position of Full Beaker, its officers, parent, or affiliates.
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