The jobs report sends mortgage rates up

Labor over inflation has been the theme for the decline in mortgage rates in 2024, with the understanding that once the labor market softens, 10-year rates should fall, which they do. However, it works both ways. I recently wrote that 2024 mortgage rates may have bottomed out, as they’re near the low end of my 2024 forecast, and unless the labor market gets much weaker, this is it.

Since the Federal Reserve Reduce the interest rate by 0.50% on September 18. Ten-year yields have risen by more than 35 basis points after a series of better economic data. Retail sales, housing starts, industrial production, unemployment claims and now the Jobs Friday report came in as a rattling of estimates. Putting all these results together, it’s not shocking that 10-year yields are up more than 35 basis points from their recent lows.

Let’s take a look at the report to see where we stand today.

By BLS: Total nonfarm employment rose by 254,000 in September, and the unemployment rate was little changed at 4.1 percent, the U.S. Bureau of Labor Statistics reported today. Employment continued to rise in food and beverage services, healthcare, government, social assistance and construction.

The headline number exceeded estimates, and the other positive data line was that we saw positive revisions of 72,000, which is noticeable. In this report, wage growth actually increased, and the unemployment rate among those without a high school education fell from 7.1% to 6.8%. With the positive revisions in this report and the headline figure, the labor market now slightly exceeds my forecast for job growth in 2024.

I started looking for data on monthly job growth that will cool to 140,000-165,000 per month as we move toward a total of 159 million non-farm wage workers. Today we are at 159,105,000; If this had not happened, I would have had to rethink all my employment models. But now that we’re here, the employment data seems more accurate than I saw earlier this year.

I expect this figure to be revised lower over time, but even with negative revisions the labor market will become weaker, not broken. Breaking it would mean unemployment claims would rise and head toward 323,000 on the four-week moving average, and that’s not happening. For now, though, the employment data matches what I was looking for.

This is also one of the reasons why I discussed how mortgage rates will bottom out in 2024. This is the updated data on average job creation over three and six months; both are slightly above my target level for job creation.

• Average over 3 months: 185K
• Average over 6 months: 166K

Here is the overview of the monthly labor prints:

As we can see, construction labor grew again. Lower mortgage rates since mid-June have made life easier for homebuilders. Their confidence has increased so much that permits for single-family homes are rising again, which is critical to keeping the residential workforce employed. We have already seen the advantage of a lower mortgage interest rate. The question that arises is: can this continue? Now that rates have risen, smaller builders who cannot afford the rates will feel the pressure again. We will watch this religiously because it is such an important variable in the economic cycle and for the Fed.

Conclusion

Will we see revisions to this report? Most likely. Is the labor market getting weaker? Yes, but it doesn’t break, at least not yet.

One of the advantages of the lower mortgage interest rate is that the number of permits for single-family homes is increasing again as demand grows. As we can see, if the rates become too high, the builders will revoke the permits. We have enough data to show that mortgage rates in the high 6% range or over 7% are simply too high to grow home sales in 2024. This applies to both new and existing home sales, so I’m encouraged to see that we can deliver benefits to the economy with lower mortgage rates, and we don’t have to worry so much about mortgage rates moving to 6% in the future increases or decreases further.