It started out as a beautiful, beautiful week for anyone who cares about interest rates – whether you’re a preapproved buyer, a loan officer or realtor…whether you are an investor or developer…if you are looking to sell a home in the near future, we were feeling really good this week.
Interest rates improved. And then the jobs report came out.
It was almost like the market willed this into existence. Starting with a no big deal manufacturing report, we saw an improvement on rates right away on Monday. Each day this week things got a little better. Mid-week ADP Payroll numbers came in a little lower than expected, interest rates improved a bit more. Then today. The jobs report yet again, I feel like a broken record here, blasted the expectation that 185,000 jobs would be added. Instead, 272,000 job creations in May. Isn’t that something…
This is tough, you know why? It doesn’t feel like we are in a booming economy full of well-paying jobs on every corner. It feels like people are getting laid off and then taking two jobs to still not make as much as the one before paid. It feels like even those who haven’t been laid off are picking up a second job to make ends meet. Twice this week I heard about how most job postings are fake – a client was telling me how all his friends in tech apply for jobs only to find out the company isn’t actually hiring, they just had to post the job for some reason. Michelle, on my team here, was just telling me how there’s fake job postings all over LinkedIn. (Yes, I am concerned about why she’s looking at job postings on LinkedIn.)
Why do we care so much about this stupid jobs report every month?
We have to remember that the Fed has two mandates – support the labor market and keep inflation under control. They have been restrictive enough to get inflation under control, they know that already. If the labor market starts to break – the Fed is in a corner where they need to ease their policy. Many feel the number that puts their back against the wall like that is 4.25-4.5% unemployment. So, when the market sees a four, we can expect a big reaction.
How long will the joy ride last?
June could still be a pretty great month. In order to understand why, you have to understand an additional power the Fed holds over markets. The Fed Funds rate is one lever they can pull to move interest rates. Mortgage interest rates are not the equivalent of the Fed Funds Rate – mortgage interest rates are driven by the supply and demand of bonds. When there is a lot of demand for mortgage bonds, mortgage interest rates are good.
As part of a long-term Quantitative Easing policy, the Fed provided demand for mortgage bonds and swooped up a ton of them over the past decade. Their balance sheet is heavy. As the Fed moved into a Quantitative Tightening phase to tackle inflation, they started dumping a lot of these bonds back into the market which drove interest rates up. They have said, and we can only take their word for what it’s worth but I’m feeling hopeful, they have said they will slow the runoff of their balance sheet this month.
That would lead to even more rate improvement. Also on our radar is the fact that both Canada and the ECB started their rate cuts this week. The European Central Bank has not cut their central bank rate since 2019, so that is pretty big news. I’m sure our Feds are taking note as typically we follow suit.
Your action steps as a buyer:
Get your preapproval updated. This drop in interest rates improves your buying power. At this stage, I would recommend weekly contact with your lender. We are calling our preapproved friends every Tuesday and Friday to make sure they are in the loop.
If you are in contract to buy a home and your rate was locked two weeks ago, check on a float down. Our company has a free automatic float down policy – once we’ve locked in your rate, if the market improves a quarter of a point or more, we’ll float you right on down for free.
Beware of your competition. We’ve been prepping for this all year – as rates drop, increased buyers will flood back into the market. You will need to know what you’re up against on each home so don’t assume that because you could ask for a credit on the house last week that you aren’t in a multiple offer situation this weekend. Work closely with your realtor and lender to run the numbers on each scenario.
If you are considering selling your home, it might be time to act quick, as buyers get news of improved rates – they need inventory to buy, and this could help you move the property faster and for more money. We are still in the midst of buying season.
As a realtor:
You do have some good news to share, so get on the horn. Call your fence sitters, call the people who quit this market. Tell them what we are seeing with home values and how lower interest rates will impact everything over the next few months. If you don’t have time to call those buyers and sellers, our team will do it. I will literally get them off the fence for you – just by showing them the data. I’d honestly love to.