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Mortgage rates edge up on surprisingly strong jobs report


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Mortgage rates edged up Friday on news that U.S. employers hired more people than expected in November, and bond market investors who fund most mortgages lost some of their conviction that the Federal Reserve will start cutting rates in the spring.

The latest jobs report, which showed employers added 199,000 nonfarm workers to their payrolls last month, is good news for those hoping that the economy can achieve a “soft landing” and avoid a recession as growth slows in the face of Federal Reserve interest rate hikes.

Employers had added just 150,000 nonfarm jobs in October, and economists polled by Reuters had expected that employment would increase by only 180,000 jobs in November.

Selma Hepp

“While the labor market continues to show signs of cooling, the cooling is falling in line with the soft-landing narrative,” CoreLogic Chief Economist Selma Hepp said, in a statement.

Although the unemployment rate fell from 3.9 percent in October to 3.7 percent in November, 6.3 million Americans are out of work and unemployment has been trending up from 3.4 percent in April.

Unemployment trending up

Overall, the pace of job and wage growth is slowing, and lay-offs remain subdued, Hepp said, “all leading to a modest rise in unemployment rate which suggest cooling of the U.S. economy in the coming year.”

But the strong jobs report also means bond market investors who fund most mortgages are now less certain the Fed will need to cut interest rates in the spring.

The bond market rally that’s brought mortgage rates down by nearly a full percentage point from 2023 peaks may not be over, but Friday’s jobs report has definitely put it on hold.

Yields on 10-year Treasury notes, which are a reliable indicator of where mortgage rates are headed next, surged 11 basis points Friday, to 4.24 percent. A lender survey by Mortgage News Daily showed rates on 30-year fixed rate mortgages were up 4 basis points Friday, to 7.09 percent.

While few investors expect the central bank to hike rates next week at its final meeting of the year, Mortgage Bankers Association Chief Economist Mike Fratantoni said markets will be keen to hear what Fed Chair Jerome Powell has to say about the prospects of future rate cuts.

Mike Fratantoni

“Interest rates jumped in response to this report, as job market strength may be enough to keep the Fed cautious with respect to any comments regarding the path for rates at their December meeting,” Fratantoni said, in a statement. “Inflation is declining, but further declines are likely dependent upon some slowing in the job market. We continue to forecast that the Fed will begin to cut rates in the spring of 2024, as job market trends are likely to weaken from here.”

At a Dec. 1 appearance at Spelman College, Powell attempted to deflate expectations that the Fed will lower interest rates soon, saying, “It would be premature to conclude with confidence that we have achieved a sufficiently restrictive stance, or to speculate on when policy might ease.”

But bond market investors ignored Powell’s tough talk, as more reports showing the economy is slowing were released this week and mortgage rates continued to fall. Heightened demand for bonds and mortgage-backed securities pushed their prices up and yields down.

Mortgage rates drop as bonds rally

Rate lock data tracked by Optimal Blue, which lags by a day, shows rates on 30-year fixed-rate loans dropped below 7 percent on Tuesday and averaged 6.95 percent Thursday, down 88 basis points from a 2023 peak of 7.83 percent registered on Oct. 25.

Powell and other Fed policymakers like to stress that their monetary policy decisions are data-driven, and Friday’s job report gives them some of the data they need to support a “higher for longer” interest rate policy.

Ian Shepherdson

“This report won’t change the Fed’s decision next week — they’re done with raising rates,” Pantheon Macroeconomics Chief Economist Ian Shepherdson said in a note to clients Friday. “But the dip in the unemployment rate makes it even more likely that Chair Powell will resist pressure to abandon his view that the Fed is prepared to hike again if necessary. And he will again push back on the idea that the Fed will be easing soon, though we remain of the view that they will start cutting rates by May at the latest.”

Mark Palim

Fannie Mae Deputy Chief Economist Mark Palim the recent drop in mortgage rates and continued job growth are beneficial for homebuyers, “however, if labor markets remain this strong, we believe the pace of mortgage rate declines will likely not continue in the near term or may partially reverse.”

The CME FedWatch Tool, which tracks futures markets to predict the odds of the Fed’s next moves, showed investors on Friday pricing in a 46 percent chance that the Fed will implement one or more cuts in the federal funds rate by March 20, down from a 64 percent chance on Thursday.

Futures markets on Friday predicted a 77 percent chance of one or more Fed rate cuts by May 1, down from 89 percent on Thursday.

Mortgage rate forecasts diverge

Source: Fannie Mae and MBA forecasts, November 2023.

In a Nov. 17 forecast, MBA economists predicted that mortgage rates will fall to the mid-6 percent range by the end of next year and drop into the mid-fives by the end of 2025.

In their Nov. 21 forecast, economists at Fannie Mae still saw the Fed pursuing a higher for longer rate strategy, which they predict will keep mortgage rates above 7 percent next year.

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