Mortgage rates really have nothing to do with the
Government , but the Government has a lot to do with mortgage rates.
Mortgage rates are set by lenders who react to the prices of
mortgage backed securities which are sold on Wall Street.
(Simplified) Mortgage backed securities are susceptible to the
gyrations of the Treasury Market (Bond Market) and tend to mirror
the Treasuries, especially the 10 year note. Not much Government
influence to this point.
The Government gets involved every time there is a report
released by one of the agencies, none bigger than the one we get
this Friday, The Non Farm Payroll report for April, otherwise known
as the April employment report. It will tell us four things: the
number of jobs created in April in this Country, but not
"household jobs", the unemployment rate, the hourly
increase or decrease in wages and the average hourly work week.
Now throw into the mix revisions of the two previous months job
creation, in the distant past usually up or down for a couple of
months and then reverse the trend. In the recent past every revision
for about six or seven months has been up for both months that are
being revised. (My recollection).
Now the icing on the cake. The main concern is not really the
amount of jobs created but the direction of the creation in relation
to the estimate by a group of economist s , as if this wasn't tough
enough. If the estimate is for 140,000 jobs and the number is
100,000 then the bond market will probably rise and interest rates
will come down because the consensus will be it wasn't a strong
report and the Federal Reserve could consider cutting interest
rates. But if the consensus is for 75,000 jobs and it comes in at
100,000 then the opposite will most likely occur, the bond market
sells off and rates go up because the report is stronger than
anticipated. Writers note: I do not make this stuff up!
If the hourly wages go up 7 cents and the projection was 4 cents
this is also bad news as it will appear that we could have wage
inflation. If the work week goes up by an hour or two this could
mean a tight labor market and again inflation which is bad news for
interest rates.
So the first Friday of every month the waiting and watching on
the days leading up to the report is rewarded at 8:30 eastern, 5:30
pacific time when the report is released. Now that you think you
understand how it works let me remind you of the revisions. If the
jobs for April come in a bit under the estimate and they revise
February and March we could still have a sell off in the bond market
because the additional jobs that are in the revision are counted in
conjunction with the April numbers, and up goes the interest rates.
Oh, by the way, the report is seasonally adjusted! The numbers
aren't really the numbers.
Just this week we had the national purchasing managers report
showing manufacturing expanding faster than had been anticipated.
Regardless of that report the odds always favor manufacturing to
lose jobs almost every month. How can that be? Different agency!
As I said mortgage rates really have nothing to do with the
Government, but the Government has a large influence on mortgage
rates. The employment report is just one of a dozen or so reports
that all work in the same manner as the report on wholesale
inflation:the producer price index,retail inflation:the consumer
price index, retail sales report, consumer confidence, durable
goods, housing starts, new home sales, etc.
When you find a rate you like for your mortgage whether it is a
purchase, cash out transaction or a refinance and you start to
wonder whether you should take it or wait, remember what you are up
against in the real world.
Roger
Schlesinger's Mortgage Minute is heard on hundreds of radio stations and
daily on the Hugh Hewitt radio show and Michael Medved shows. Roger
interacts with his hosts and explores the complicated financial markets in
order to enlighten his listeners and direct them along their own unique road
to financial freedom. Roger is the President and founder of Manhattan
West Mortgage.
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