Weak employment data pushed mortgage rates lower last week. Against expectations of 110,000 new jobs created in August, last Friday’s Non-Farm Payrolls report showed a loss of 4,000 jobs.
The story made headlines all over the country this weekend but its connection to mortgage rates is not always clear. Here’s how the jobs report relates to mortgage rates:
1. An employed person earns an income
2. An employed person spends money on goods and services
When more people are employed, more U.S. dollars are circulated inside the U.S. economy. It’s widely believed that two-thirds of the economy is the result of consumer spending, in fact.
So, because the economy showed job losses, market participants are predicting that the economy will start to slow down as fewer dollars are spent. Fewer workers, in other words, equals slower growth.
Now, when the economy is growing quickly, the dollar is a risky investment because its purchasing power can weaken dramatically. This contrasts with when the economy is slowing down, when the risk of devaluation (i.e. inflation) subsides.
A less-risky dollar renders mortgage bonds more attractive for foreign investors because bonds are denominated in U.S. Dollars. More demand for bonds leads to lower rates.
And that’s the connection — fewer workers means slower growth means less risky dollars means more demand for mortgage bonds means lower mortgage rates.
This week, we’ll get to see if consumer spending habits are changing yet. Friday, the Department of Commerce will release August’s Retail Sales report. It’s expected to show a 0.3% increase over July.
(Image Courtesy: The Wall Street Journal Online)