Why It's Good News For Home Buyers When Unemployment Rates Surge

On the first Friday of every month, the Bureau of Labor Statistics releases its Non-Farm Payrolls report.

More commonly called the "jobs report", today's 2-page analysis of May 2008 shows that the economy shed jobs and that unemployment surged.

This is terrific news for home affordability.

That may sound counter-intuitive, so let's dig deeper into the jobs report and what it really tells us about the U.S. economy.

Over the last year, rising food and energy costs have chipped away at household budgets, leaving Americans with two basic choices:

1. Spend less on discretionary items like vacations and dining out
2. Demand more pay at work so they can vacation and dine out

If Americans choose to spend less, the economy eventually slows down because two-thirds of it is tied to Consumer Spending. This is anti-inflationary.

But, if Americans demand pay raises instead, businesses eventually pass those higher wage costs back to consumers in the form of higher prices.

This is called a "wage-price spiral" and it's very inflationary.

So, because today's jobs report showed unemployment surging by a half-percent to 5.5%, Americans really have no choice but to follow the "Spend Less" path -- they're not in a position to demand more pay at work.

Today's jobs data is good for home affordability because it relieves inflationary pressures in the economy and when inflation is falling, mortgage rates tend to do the same.

Better mortgage rates mean less expensive housing payments.
SourceEmployment Situation SummaryBLS.gov, June 6, 2008

(Image courtesy: Wall Street Journal)

Looking Back and Looking Ahead

Mortgage rates edged lower last week, buoyed by a weak employment report for March.

After shedding 80,000 jobs last month, the number of working Americans is lower by 232,000 so far this year.

Many pundits are claiming these figures are proof of a U.S. economic recession but it's important to keep the data in perspective.

According to the government, there are 153 million people in the workforce.
The 232,000 terminated workers, therefore, represent a fractional 0.15 percent of the workforce. This is a very small percentage.

This week, there isn't much new data for markets to digest but we'll want to keep an eye on some important events.

The first is Monday's Consumer Credit report. As the Federal Reserve has lowered the Fed Funds Rate, Prime Rate has fallen, too, and that means that credit card interest rates are down.

The Consumer Credit report will show whether Americans are spending the country out of a recession. Ballooning national debt levels should cause mortgage rates to rise because more spending on the consumer level increases the likelihood of inflation later this year.

The second is Tuesday's release of the Federal Open Market Committee's March meeting minutes.

We know what the Fed said and did after its last meeting; the minutes, though, give us the "Behind the Scenes" look at the debate. There shouldn't be much in the minutes that we haven't already heard, but if there is, expect mortgage rates to swing wildly in response.

Other than that, there's not much doing this week. A few Federal Reserve speakers will be out and Friday we'll get to see the University of Michigan Consumer Sentiment survey.

The biggest threat to mortgage rates this week is ongoing news of financial stability (or instability) with large banks and investment houses.

Mortgage markets do not like it when banks go insolvent so be aware of that type of news if it surfaces because it can change the direction of mortgage rates in an instant.