Unhurried job growth may keep mortgage rates low

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Mortgage rates won’t rise much in the second half of this year if the economy keeps jogging along at its current pace.

That’s good news if you have a nice-paying job and you’re looking to buy a home. You can shop for a mortgage, knowing that interest rates are unlikely to skyrocket. Home prices, on the other hand, are going up quickly in most places. So maybe you want to move quickly after all.

What’s up with jobs?

The economy added a net 138,000 jobs in May, according to the Labor Department. That was less than expected. The initial job-creation estimates for March and April were reduced by a total of 66,000. Average hourly earnings are up 2.5 percent in the last 12 months.

The job growth numbers are kind of a bummer. And why haven’t wages risen faster?

That’s why I say the economy is jogging, not running. Nevertheless, the Federal Reserve is still expected to raise short-term interest rates when it meets June 13 and 14. By increasing the federal funds rate, the central bank aims to slow the economy a smidgen to keep inflation under control. A rate hike also gives the Fed some room to cut interest rates in the future when the economy goes into recession.

Will Fed hike rates in December?

But what about later in the year? Most observers expect the Fed to increase rates this month and then again in December. Now some doubt is creeping in about the probability of a year-end rate hike.

Curt Long, chief economist for the National Association of Federally-Insured Credit Unions, says “the slowing pace of job growth combined with still-muted wage growth may lead some officials to downgrade their expectations for further policy tightening in the second half of the year.”

If a December Fed rate increase is seen as increasingly unlikely, that expectation might keep mortgage rates from rising much. That would be positive for people who comparison-shop for mortgages late this year.

What about the Fed’s assets?

A deferred rate hike is not the only thing that could keep mortgage rates tethered low to the ground. The Fed is expected to begin shrinking its balance sheet late this year — an action that would indirectly push mortgage rates higher. But this month’s meh jobs report “certainly calls into question their plans to begin shrinking the Fed’s balance sheet later this year,” says Alan MacEachin, chief corporate economist for Navy Federal Credit Union.

This scenario wouldn’t spell great news for the overall economy. But if you’re going to shop for a mortgage sometime this year, you don’t have to worry about a rapid rise in rates.

Home construction a bright spot

Today’s most optimistic take was delivered by Lawrence Yun, chief economist for the National Association of Realtors. He notes that construction jobs are expanding at twice the overall rate of job growth. It’s an indication that more new houses will be built. New homes for sale “will steadily show up as we proceed through the year,” Yun says.

I hope he’s right. We need more new homes, especially if they’re affordable for first-time homebuyers.

Holden Lewis

I have a nice house and a nicer mortgage rate. Let me show you how to do the same.