When the labor market is deemed “strong,” you can bet that mortgage rates are pretty high.
So after the Bureau of Labor Statistics released what was considered a positive jobs report for January (with a rising number of payroll jobs and no changes to the unemployment rate), the average rate on a 30-year fixed mortgage made a sudden and drastic jump above 7%.
Why does good news for the economy spell bad news for prospective homebuyers?
Inflation and employment data provide insights into the general health of the economy, influencing whether the Federal Reserve -- which is tasked with containing inflation and maximizing employment -- adjusts interest rates up or down.
“An increase in jobs is good theoretically, in the sense that more people employed means more people seeking to buy homes and take out mortgages,” said Gene Ludwig, former comptroller of the currency and founder of the Ludwig Institute for Shared Economic Prosperity. “However, right now these robust jobs reports make it less likely that the Fed will drop interest rates,” he added.
Though the central bank doesn’t directly set the rates for mortgages, keeping interest rates high makes the cost of borrowing more expensive, including for home loans.
Experts still predict mortgage rates will drop to the low-6% range by the end of 2024. But the housing market is a volatile creature. Because mortgage rates fluctuate for many reasons -- supply, demand, inflation, monetary policy and jobs data -- homebuyers will experience some bumps along the way to a more affordable mortgage market.
Read more: Is It Worth Buying a Home in 2024? 10 Tips from Housing Market Experts
Economic data and mortgage rates are strongly linked
If you follow mortgage trends, you’ve heard how the direction of interest rates depends on a combination of incoming economic data and the Fed’s decisions.
Let’s break some of it down. Key indicators, such as the inflation rate and labor market growth, signal how the economy is performing. Those signals affect investor expectations and appetites, setting off a chain reaction in financial markets. The first impact is in the value of government Treasury bonds, which influences other bond markets, like mortgage bonds (also called mortgage-backed securities). When the value of mortgages goes up for investors, that causes the interest rates on home loans to increase, as well.
For example, last November, a weaker jobs report sent mortgage rates on a nine-week falling streak to cap off 2023. But when stronger-than-anticipated employment data was released earlier this month, it pushed up the 10-year Treasury yield (a key benchmark for the 30-year fixed mortgage), and home loan rates followed suit.
Additionally, the Fed monitors the inflation rate and labor market growth to determine its monetary policy. In response to record-high price growth two years ago, the Fed started hiking interest rates to slow down the economy and blunt inflationary pressures. While inflation has decreased significantly since 2022 (and is nearing the Fed’s 2% year-over-year target), interest rates for borrowing aren’t likely to ease until inflation is fully contained.
“A stronger labor market makes one worry about inflation on the horizon, and inflation puts a brake on mortgage rates coming down,” said Ludwig.
The limitations of official labor data
Monthly job reports by the Bureau of Labor Statistics include unemployment numbers, wage growth, job openings, productivity and more. While headline figures may paint a broad picture of the economy, some experts say that nationally aggregated data doesn’t accurately reflect which areas, populations and industries are more negatively affected.
For instance, the official unemployment rate is 3.7%, but that figure doesn’t include those who have given up looking for work or those who are no longer able to work. However, that figure counts “underemployed” workers (those in part-time, contract or temporary positions) as employed.
“The labor market is less robust than the numbers would suggest because quite a number of these jobs are part-time, low-pay jobs,” said Ludwig. His organization LISEP calculates the true level of unemployment to be more than six times higher, at 22.9%.
“There are mixed signals,” said Brett Ryan, senior economist at Deutsche Bank. While headline statistics show a rising number of employment opportunities, some 70% of job gains over the last six months are from only three sectors: government, leisure and hospitality, and private education and health services, Ryan said. Meanwhile, multiple sources point to a surge in job cuts and layoffs, particularly in the tech and financial sectors, which paints a much more precarious picture of the employment landscape.
Furthermore, the nature and quality of work has changed over the last period. “Many people have multiple consulting jobs or multiple remote full-time jobs,” said Erin Sykes, chief economist at Nest Seekers International. Though they might be making enough income to cover inflated prices, it’s not a sustainable situation, Sykes said.
Read more: Unemployment Statistics Are Misleading. Economic Hardship Is Much Worse
How will jobs data affect mortgage rates this year?
While recent labor data sparked an uptick in mortgage rates, it’s challenging to predict what’s next. One thing is for sure: A strong economy makes it tricky for the Fed to decide when to start making rate cuts, so mortgage rates could stay higher for longer.
What the experts are saying
“If the labor market stays hot while inflation remains above the 2% target, the Fed doesn’t have as much incentive to cut rates. That’s why stronger-than-expected jobs data sent bond yields (and therefore mortgage rates) higher this month.”
- Alex Thomas, senior research analyst at John Burns Research and Consulting
“All else being equal, a positive jobs report means that the Fed will be reluctant to cut interest rates and therefore mortgage rates will stay high, pricing many potential buyers out of the market.”
- Brett Ryan, senior US economist at Deutsche Bank
“Strength in job creation and continuation of low unemployment rates suggest that consumers are in a position to continue to spend, which in turn, could keep the inflation rate elevated. Inflation rates above the Fed’s 2% target will postpone the Fed’s decision to start cutting the funds rate and will delay further declines in mortgage rates.”
- Selma Hepp, chief economist at CoreLogic
“The economy has been stronger, both in terms of job creation and economic growth, than forecasted for the end of 2023 and the start of 2024. Improved economic growth means somewhat higher long-term interest rates, particularly for the 10-year Treasury rate, which helps to determine mortgage rates. Additionally, if economic growth is better than markets expect, the path to the Fed’s 2% inflation target will be more challenging, likely pushing back some rate cuts for late 2024.”
- Robert Dietz, chief economist at the National Association of Home Builders
How will employment data affect housing demand and home prices?
Labor market data not only affects the Fed’s interest rate adjustments and investor behavior. Employment and wage levels also affect the demand for homes, which can influence mortgage rates and home prices.
What the experts are saying
“A strong labor market and a growing labor force are positive for the housing market. While the Fed is closely monitoring for signs that a resilient labor market may put upward pressure on wages and threaten further inflation, so far wage growth is cooling and the labor market doesn’t seem to be a threat to sustainably lower inflation. Additionally, positive wage growth, all else held equal, boosts house-buying power, which may help potential homebuyers in today’s affordability-constrained market.”
- Odeta Kushi, deputy chief economist at First American Financial Corporation
“Strong job markets ensure that potential homebuyers have income and the resources to buy a home, which drives demand for homes. In the current housing market where the supply of available homes is low, strong demand also means more pressure on home prices and higher prices over time.”
- Selma Hepp, chief economist at CoreLogic
“Stronger labor market will bolster demand and keep home prices from falling. Though the Fed’s actions have helped to dramatically lower the pace of home price appreciation, in aggregate, home prices are still rising in year-over-year terms.”
- Brett Ryan, senior US economist at Deutsche Bank
“Stronger employment will support current interest rates and prices. Without a significant pullback in employment, we will not see a drastic decrease in prices.”
- Erin Sykes, chief economist at Nest Seekers International
Advice for homebuyers
The direction of mortgage rates isn’t permanent. Next month’s data could paint a different story about the labor market and inflation risks. If inflation continues to go down and the labor market loosens, it could provide some room for mortgage rates to fall.
While the economic factors affecting mortgage rates and home prices aren’t within your control, you can do things like building your credit score, paying off debt and saving for a bigger down payment to help you secure the best mortgage interest rate for your situation.
More mortgage resources
