Mortgage rates plunge as job creation halts
By Holden Lewis • Bankrate.com

Mortgage rates plunged when Wall Street heard the news that the economy created only 1,000 jobs in December, and hundreds of thousands of people dropped out of the workforce.

The benchmark 30-year fixed-rate mortgage fell 19 basis points to 5.68 percent, according to the Bankrate.com national survey of large lenders. A basis point is one-hundredth of 1 percentage point. The mortgages in this week's survey had an average total of 0.40 discount and origination points. One year ago, the mortgage index was 6.00 percent.

The 15-year fixed-rate mortgage fell 18 basis points to 5.01 percent. The one-year adjustable-rate mortgage fell 15 basis points to 3.70 percent.

Jobless reports tamps down rates
The Department of Labor issued a horrible employment report Jan. 9. It ostensibly heralded good news: The unemployment rate dropped from 5.9 percent in November to 5.7 percent in December. But the unemployment rate fell only because so many people apparently stopped looking for work. It was as if a city's rate of muggings declined, but only after people had locked themselves in their homes because they were too scared to venture into the street. That's a sign of weakness and desperation, not a sign of strength and confidence.

The economy created a net of 1,000 jobs in December, the Labor Department calculated -- an average of 20 jobs per state for the entire month. The drop in the unemployment rate resulted from the shrinkage in the workforce, not because of the addition of 1,000 jobs.

Even as job creation stalls and unemployed people get discouraged and stop job-hunting, the economy grows rapidly because workers are becoming more productive. Businesses can produce more with the same number of workers, and those productivity gains remain strong quarter after quarter. In the third quarter of 2003, the latest quarter in which the information is available, productivity rose at an annual rate of 8.1 percent.

Why mortgages are affected
An economy with high productivity and feeble job creation is anti-inflationary, says Richard DeKaser, chief economist for National City Corp. The bond market looks at the productivity and inflation numbers and concludes that interest rates will remain low for a considerable period, whether the rates are set by the market or by the Federal Reserve. Mortgage rates fell because estimates about inflation and employment fell.

"It is not, in my opinion, a serious threat to the economy," DeKaser says, "because mathematically, as long as economic output is increasing, productivity growth must result in either higher real wages or higher profit margins." Most people believe that it's going to higher corporate profit margins, which will result eventually in more business investment.

"If, in fact, you're seeing heightened labor productivity growth, and the expansion is not jeopardized ... what it means is that as we go forward in 2004, you're not likely to see the labor market tighten, which would take up the slack that would give us increased compensation that gives us inflation," DeKaser says.

Bad news, good news
For the unemployed, this means that jobs will continue to be scarce. For workers, it means that raises will be meager this year. For mortgage shoppers, it's great news, because low inflation and a jobless recovery will keep interest rates low.

DeKaser treats the employment numbers with skepticism, and says it is possible that the employment numbers are wrong. Perhaps the economy produced a lot more than 1,000 jobs in December; the employment number will be revised at least twice.

Dave Herpers, director of consumer affairs for mortgage lender Amerisave, notes that the employment numbers run counter to other data that seem to show that the economy is growing like gangbusters.

Lock now?
Herpers believes that the market overreacted to the feeble employment report, "so we saw a huge dip in mortgage rates and now we're starting to see them inch up."

The Labor Department produces its monthly employment report based on a household survey, which is subject to revision. Each month, the department estimates the size of the workforce, which consists of people who have jobs and people who are looking for jobs. The unemployment rate is the percentage of the workforce that is jobless and looking for work.

In December, the workforce shrank by 309,000. The reason for the decline is unexplained. The logical explanation is that those people gave up and stopped looking for work. But the Labor Department counts these people, called "discouraged workers," and says their numbers were about the same as a year before, at 433,000.

Not everyone who drops out of the labor force is a discouraged worker; some enrolled in school, retired or quit to stay at home with the children.

The Labor Department keeps track of another statistic -- the employment-population ratio. It's the percentage of Americans age 16 and older who have jobs. The ratio was 62.2 percent in December. It has fallen steadily since April 2000, when it topped out at 64.7 percent.