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Mixed May Jobs Report Won’t Send Mortgage Rates Soaring

The U.S. added 559,000 jobs in May, reducing the unemployment rate by 0.3 percentage points to 5.8%, according to the Bureau of Labor Statistics (BLS).

That’s more than double the 278K jobs added in April. However, May employment fell well short of market forecasts for 650K new jobs.

If you’re waiting for employment to recover to pre-pandemic levels, this report wasn’t so great. But, if you are looking to buy a house with a sub-3% mortgage rate, you can take a deep breath.

How employment affects mortgage rates

In order to understand how a jobs report impacts mortgage rates, we have to pull back the curtain on the Federal Reserve. 

When the economy crashes — as it does during global pandemics — the Fed infuses cash into the economy by purchasing additional bonds and securities. This policy is called quantitative easing.

Among these purchases are Mortgage Backed Securities (MBS), which are essentially bundles of home loans. As the Fed gobbles up MBS, consumer mortgage rates fall. Why? Because the Fed places artificial demand on them. The more demand, the lower rates of return (mortgage rates) have to be. 

That’s what happened as a result of the pandemic and why we’ve been seeing historically low mortgage rates.

Now, with the pandemic waning and the economy recovering, we’re left wondering when the Fed is going to lose its appetite for MBS.

Flashbacks to the 2013 Taper Tantrum

If you look back at the last 10 years of Freddie Mac Primary Mortgage Market Survey interest rates, you’ll see a steep climb in May 2013.

Screenshot of Freddie Mac PMMS.

This is a period known as the Taper Tantrum. It represents a time following the 2008 housing crisis when the Fed felt it needed to wean the economy off its support. Before taking any action at all, it merely announced that at some point it would ease off the gas.

The announcement alone rattled investors and triggered a massive sell off of bonds and securities, including MBSs, which sent the 30-year fixed-rate surging from 3.35% to 4.46% in a matter of weeks.

The event unearthed two things:

  1. The market had become dependent on the influx of cash from the Fed
  2. Investors are easily shaken and prone to drastic action

Taper Tantrum 2.0?

Today we find ourselves in a similar position as 2013 in terms of interest rates. The Fed successfully lowered interest rates and encouraged homebuying through quantitative easing. But now there appears to be a collective sense of “How long can mortgage rates stay below 3%?”

The answer is not forever. At some point the Fed will decide to taper its stimulus purchasing, and if history is any indicator, it will likely trigger a spike in mortgage rates.

It’s anyone’s guess as to what will catalyze this chain of events, but the May jobs report certainly doesn’t seem to have the muster.

What to do now

While the May jobs report doesn’t pose huge risk to mortgage rates, it’s only a matter of time until something does.

The Fed will stop holding rates artificially low. The only question is when.

If you’re in the market to buy anyway, it might be best to capture rates while they are still near all-time lows,

Further Reading