Mortgage rates jumped last week with the announcement of new unemployment figures and if you're wondering why you're not alone.
The sudden increase -- initially as much as a half a percent before the market reacted more rationally -- was both expected and absolutely unjustified. Here's why:
Once a month the Bureau of Labor Statistics reports the unemployment figures. These numbers are notable because they're always wrong. It doesn't matter who is President or which party runs Capitol Hill, you can be entirely certain that the number produced is an economic fiction.
Jobs and Mortgage Rates
The report for February says that 175,000 jobs were added to the economy during the month. This figure was better than expected because February had seen brutal winter weather across the country and so the prevailing opinion was that fewer jobs would be created.
“Disruptive and prolonged winter weather patterns across the country are impacting a wide range of economic activity, and housing is no exception,” said Lawrence Yun, NAR's chief economist. “Some housing activity will be delayed until spring.”
You might think that better unemployment numbers would be a large, fat plus in the economic equation, but for mortgage rates more employment is regarded as a problem because better job numbers suggest an expanding economy. The thinking is that a growing economy requires more capital as employers grow their operations, thus there will be more need for capital. In turn, that means more competition for dollars and therefore interest rates go up.
However, the jobs figures are an artificial creation. For instance, both the unemployment rate and the number of unemployed workers increased during February. To make matters more confusing, 2.3 million people were marginally attached to the labor force, an increase of 285,000 when compared with last year. These are, says the BLS, individuals who were not in the labor force, who wanted and were available for work, and had looked for a job sometime in the prior 12 months. They were not counted as unemployed because they had not searched for work in the four weeks preceding the survey.
Among the marginally attached were 755,000 discouraged workers, individuals not currently looking for work because they believe no jobs are available for them.
Translation: A lot of people not counted as unemployed are actually unemployed as most humans understand the term. If you add in the people we do not count as unemployed to the those we officially recognize as unemployed then the unemployment percentage would be much higher, something no one in Washington wants to see.
Not only are the unemployment figures the by-product of strange and unusual statistical practices, so is the thinking that created an instant increase in mortgage rates when the February figures were announced.
The announced level of job creation was higher than expected but that does not mean there will be a new and instant demand for capital. It takes months if not years for businesses to expand, and yet rates instantly rose. That means mortgage borrowers face higher rates today even though the demand for capital might not occur for months into the future. Or, maybe not at all, because next month's jobs report -- as flaky as every other jobs report -- could show fewer jobs than expected in March, thus driving down mortgage rates until the April jobs report when the whole process repeats itself.
The bottom line is this: In theory the idea that mortgage rates should rise over time when employment increases is logical. In practice, the idea that mortgage rates should quickly rise is nonsense, not only because the unemployment numbers do not reflect marketplace realities but also because many factors determine interest levels, not just job levels.