October 3, 2014

Jobs and Interest Rates

Today, the Bureau of Labor Statistics released its employment report for the month of September. According to the report, the private sector added 248,000 jobs in September and (this is important) the unemployment rate decreased to 5.9%. This all sounds like excellent news! The economy is recovering, although at a slower rate than anyone wanted. There are also many people who are still unemployed that feel that the economy is not improving and the numbers are being manipulated. Either way, the 5.9% number is a special one that needs examination.
interest rate

The Federal Reserve has stated since the beginning of quantitative Easing (QE 1, QE 2 and QE 3) that they would keep interest rates low until such time as the economy improved to a level that they felt it was strong enough to absorb an increase in interest rates. Their measure of a stronger economy was an unemployment rate of 6% or lower. We have achieved that number officially today.

Along with what is happening above, October marks an end to the Fed purchasing government notes and mortgage backed securities. During QE3, the Fed was purchasing $85 billion in these instruments and had been trending toward not purchasing them for about a year. This means that with the demand for these instruments drastically reduced, prices for them will also go down and the yield (interest rate) will go up.

In a nutshell, here is what the Fed is doing; it is no longer ‘investing’ in securities and it plans to begin an increase in interest rates because the economy is stronger. This is a double whammy on the bond market which may result in an interest rate spike as holders of bonds may decide to sell. The Fed has not indicated whether or not they would be disposing of their $1.8 trillion investment in these instruments. I would suspect for now that they are holding on to them.

The impact on real estate mortgage loans is that since money will be more expensive for the investors to borrow, they will be passing that cost to the borrower in the form of higher mortgage rates.

While interest rates are near historic lows, we need to keep an eye on increases and where they will take us. Long term, a 6% interest rate on a 30 year mortgage was considered a pretty good rate. We have not been at that level since 2007. In many people’s minds this is a very long time and returning to that level may seem drastic, but over time we have become conditioned to the 4% range.

If you have questions on this, please comment on the blog or call us at 925-308-7045!

Leave a Reply