Employment Report Affects Mortgage Rates

There are several monthly economic reports released that contain pertinent information relating to a variety of financial issues. A July 14, 2006 USAToday.com article, “How the Job Market Affects Mortgage Rates,” explains why one economic report is so influential towards mortgage rates.

The Employment Report is the most influential report relating to mortgage rates. This reason for this is because of the involvement of the Federal Reserve, or “the Fed.”

“The Federal Reserve is responsible for doing two things for the U.S. economy: 1) Keeping inflation under control and 2) fostering growth in the economy. To do this, they control the level of short-term rates.”

If the unemployment rate goes up, the Fed will lower short-term rates in order to stimulate the economy. Basically, if the unemployment rate rises it means that more people have less money to pay for things, so the Fed attempts to help this by lowering rates.

In contrast, when the Employment Report shows that the employment rate has increased, the Fed raises short-term rates to control economic growth. More employment means that there is more money for people to pay for things, but the Fed has to make sure that the economy does not grow too fast and get out of hand.

“Right now, the unemployment rate is at 4.6 percent. So far, job growth has leveled off over the past few years which could indicate a pause in short-term rate hikes. To date, the Fed has raised short-term interest rates 17 times since mid-2004 and they will meet again in August.”

“Also, since short-term interest rates and mortgages, such as adjustable rate mortgages (ARMs) and home equity loans, are closely tied, when the Fed raises or lowers short-term interest rates, rates for ARMs and home equity loans do the same.”

Changes in mortgage rates can be the determining factor for what mortgage is used to buy or refinance a home.

The Employment Report has the power to influence mortgage rates and the housing market. “Homeowners with adjustable mortgage rates have continued to experience a rise in their monthly payments.”

You can never exactly predict the future of the market. Although the Fed has agreed to stop rate hikes, there is a strong possibility this will not happen. People with high interest rates and high monthly payments should still consider refinancing even though rates should drop in future months.

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