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Mortgage Market Guide courtesy of Alan World Gem Mortgage

December 5, 2011

Last Week in Review

It’s been said that “slow and steady wins the race.” And when it comes to the Jobs Report for November, it seems that the labor market continues to improve at a gradual pace. Read on for the details…and what they mean for home loan rates.

There was good news, as the headline number for job creations in November came in at 120,000, with 140,000 private jobs offsetting government losses. What’s more, some upward revisions to the two previous readings added 72,000 more jobs than had been reported.

Perhaps even more important, Hourly Earnings grew by just 0.1% – a number that suggests no threat of wage-based inflation. Remember, inflation is the arch enemy of Bonds and home loan rates because when inflation rises, investors in Bonds demand a higher yield to offset the lost buying power inflation imposes on a fixed payment. And as home loan rates are tied to Mortgage Bonds, this would mean home loan rates move higher. So the Hourly Earnings number was good news for Bonds and home loan rates.

Catching the markets by surprise was a rather sharp decline in the unemployment rate to 8.6%, the lowest unemployment rate we’ve since March of 2009. While this is good news on the one hand, part of the decline stems from the fact that 315,000 people were removed from the workforce because they totally gave up looking for work. And with 13.3 million Americans still out of work, more improvement is certainly needed here.

Similarly, the labor participation rate (which is currently hovering at a 30-year low at 64) needs to move above 66 or it will be difficult for the economy to grow fast enough to lower our budget deficit. In fact, last week Bond ratings firm Fitch issued a stern warning to the US, saying that our AAA rating will be in jeopardy if we don’t soon do something to rein in our own ever-growing budget deficit.

It is good news that we’re seeing some slow and steady improvement in the labor market…and coupling this with other recent positive economic signals, means we are not near a recession at the moment. But our economic health remains fragile, and any external shock from Europe could easily disrupt the economic improvement we are seeing.

The bottom line is that the uncertainty out of Europe – and the prospect of additional Mortgage Bond buying (QE3) from the Fed – should continue to support Bonds and home loan rates as they will benefit from investors looking for a safe haven for their money. However, it is also unlikely that Bonds and home loan rates will improve much further. Inflation, while not yet a problem, is still elevated…and if it continues to creep higher, this will limit any improvement home loan rates may see. With home loan rates still near historic lows, now remains a great time to purchase or refinance a home. Let me know if I can answer any questions at all for you or your clients.

Courtesy of Alan World
Gem Mortgage
Office: 714-569-3636
E-Mail: alworld@earthlink.net

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