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Jobs report = bad news for borrowers

By Polyana da Costa · Bankrate.com
Friday, December 6, 2013
Posted: 11 am ET

The November employment report brings good news to the economy, but should serve as a wake-up call to mortgage borrowers.

The economy added 203,000 jobs in November and the unemployment rate fell to 7 percent, its lowest level in five years, according to the Department of Labor. Economists had expected the rate to tick down from 7.3 percent to 7.2 percent with the addition of 185,000 jobs.

And that could mean higher interest rates.

Normally, when the jobs report beats economists' expectations, mortgage rates climb as investors gain confidence to bet on riskier investments. That hasn’t happened yet, but there's still reason for concern. That's because the November report can be seen as a sign for when the Federal Reserve will decide to slow the pace of the bond-purchasing stimulus program that has suppressed mortgage rates for so long.

The central bank has been spending $85 billion a month in the purchases on long-term U.S. Treasury and mortgage bonds. The Fed says it will taper the program when the labor market improves.

Timing is an issue

Many economists say they don't expect the Fed to reduce the pace of purchases this year, but this report could be a game changer.

"It makes the likelihood that the Fed will taper in December a bit higher," says Paul Edelstein, director of U.S. financial economics at IHS Economics. "It raises the probability."

But tapering may not lead to a major spike in mortgage rates, even if a reduction in bond purchases happens this year, he says.

"The markets are a bit on notice at this point," he says. "They have had time to adjust. There could be some movement in markets, but nothing major."

The main event is far off

The big spike in rates will likely happen when the Fed decides to raise the key federal funds rate, and that's not happening this year.

Still, borrowers shouldn’t take a chance. If you like the rate you are offered today, lock it.

Follow me on Twitter @Polyanad.

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