Mortgage Market Update – Why Rates Are Going Up and What Friday's Jobs Report Will Do

Once again, it’s not starting out to be a good day for the mortgage market.   Let me offer some explanations of what’s happening and how it might play into how to deal with the Jobs Report that comes out tomorrow.   Here goes:

• The markets seem to be spinning every even remotely positive economic news as good news.   Retailers have posted some quite awful sales reports compared to last year but when the market looks at them, they aren’t quite as bad as expectations, so it’s a good thing.   ONLY 550,000 people applied for new unemployment benefits last week, down from 588,000 the week before, so that’s a good thing.   People are buying cars – but they are doing it because the government is giving them $4500 for a $300 clunker.
• Pending home sales were up quite substantially – but many analysts think it’s because of the looming “deadline” for the $8000 First Time Home Buyer tax credit and the fact that it expires on November 30.

With these types of “asterisk” reports coming out and the bond market reacting negatively to them, there are a couple of things that I expect with the employment reports tomorrow:

• The report will not come in really good.    It’s not going to show that jobs were actually created or anything like that.
• The report will not come in really bad.   We aren’t going to see 700,000 jobs lost or something that bad.
• The report will come in very mediocre.   There will be parts of it that will be decent and parts of it that show the job market is very lackluster at best.
• The financial markets will focus on the parts that are decent and ignore the parts that are bad.   This is in line with all of the reports that have come out lately.
• The mortgage market will sell off and rates will go higher.

If you look at the three possible outcomes – really good, really bad or mediocre, there’s really only one of them that could have a positive impact on rates.   If the jobs report comes in WAY worse than what the market expects (and they expect something in the 300,000′s of jobs lost), we could see rates drift down.   All other outcomes will push rates higher.

So, what do you think my recommendation is?   Lock sooner rather than later.   Of the three possible outcomes for the jobs report and it’s impact on rates, I’m estimating there’s approximately an 80% chance that an outcome that pushes rates up and only a 20% chance of an outcome that pushes rates down.

I’ll continue to keep you informed.  I’ve got a couple of meetings scheduled tomorrow morning, so I might not have anything major about the jobs report until the afternoon.