Will Job Growth Start Pushing Interest Rates Higher?

Keeping you updated on the market! For the week of November 17, 2014

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MARKET RECAP Will Job Growth Start Pushing Interest Rates Higher? The economy continues to manufacture employment at a brisk pace: Payroll jobs advanced by 214,000 in October. This marks the ninth-consecutive month of 200,000+ job gains. Other positives from the October employment report include the unemployment rate, which declined to 5.8%. Better still, the composition of the workforce is improving. The prime working age group – people in their 20s and 30s – is growing again. This developing trend bodes particularly well for housing. After all, we're all waiting for millennials to finally participate in the housing recovery. At the beginning of the year, we speculated that a strong employment trend would lead to higher mortgage rates. That hasn't been the case. But in our defense, our speculation was based on Federal Reserve guidance. The Fed had initially set an unemployment rate target of 6.5% before it would consider raising interest rates. We're obviously well below that rate, yet the Fed is showing no signs of raising rates soon. Fed officials still believe the economy is too weak and job growth too sluggish to raise rates. It's interesting that the Fed remains cautious. The fact is that the economy is on track to add 2.74 million jobs this year. This means 2014 would be the best year for job growth since 1999. Despite the upbeat data on jobs, mortgage rates drifted slightly lower over the past week: Bankrate.com's survey has the 30-year fixed-rate loan averaging 4.13%. Freddie Mac has the 30-year loan averaging 4.01%. Low rates and strong employment gains, yet overall mortgage activity remains subdued. The MBA's refinance index decreased 0.9% last week. The purchase index increased, but only by 1%. The MBA did report positive news on new-home sales. The MBA estimates sales increased by 8.5% in October to an annual rate of 461,000 units. On an unadjusted basis, the MBA estimates that there were 36,000 new home sales in October, a 12.5% increase from September sales of 32,000. The downside to this week's data is that a market dichotomy persists: Job grow and low mortgage rates are driving growth in the upper levels of the housing market. Tight credit, on the other hand, still impedes entry-level growth. We are encouraged, though. With more young people finding employment, we should see more growth in the lower echelons of the housing market in the coming year.

 

Economic Indicator	Release Date and Time	Consensus Estimate	Analysis
Home Builder Sentiment Index (November)	Tues., Nov. 18, 10:00 am, ET	55 Index	Important. Sentiment remains positive, but has not improved in recent months.
Mortgage Applications	Wed., Nov. 19, 7:00 am, ET	None	Important. Activity remains flat, but job growth points to more activity in coming months.
Housing Starts (October)	Wed., Nov. 19, 8:30 am, ET	1.03 Million Units (Annualized)	Important. Gains have stalled, but starts continue to hold above one million.
Existing Home Sales (October)	Thurs., Nov. 20, 10:00 am, ET	5.1 Million (Annualized)	Important. Sales continue to hold above five million, but show little inclination to move much higher.

 

Does Economic Growth Matter? The short and quick answer is “it depends.” When pundits discuss the economy, they usually speak of gross domestic product (GDP). You'll frequently read that GDP is growing at a 3% annual rate, or some similar number. Financial markets are encouraged when GDP grows at a higher rate, and discouraged when it grows at a lower rate. The Federal Reserve certainly focuses on GDP and will adjust interest rates based on GDP growth. In that respect, GDP growth impacts our business. But in other respects, GDP doesn't really matter. GDP is an aggregated national number. It's a measure of all the goods and services produced domestically. But like in real estate, a number taken from the economy as a whole can be meaningless to any local economy. For example, what occurs in Silicon Valley can have little relationship to what occurs in the Bakken oil shale fields of North Dakota. One local economy could grow, while the other could shrink. A national GDP number would likely be meaningless to either market. What most of us really care about is the specific data in our neck of the woods. The businessperson rightly establishes his or her own network of information concerning a particular venture in a particular market. Only that businessperson will know what type of information he or she needs in order to succeed. Most likely, that information won't be based on national numbers. So don't let the national data overly influence your mood or real estate market outlook. What occurs in our backyard is what matters most. Article Courtesy of Patti Wilson, American Momentum Bank