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Strong Job Growth Signals Likely Interest-Rate Hike in Mid-December

By Steve Hovland
Director of Research

The job market surged in November, cementing a rate hike by the Fed next week. Nonfarm payrolls expanded by 228,000 position last month, above expectations, and the unemployment rate remained remarkably low at 4.1 percent. To date, action by the Fed can best be described as pushing on string as several hikes have failed to move the needle on bond and mortgage rates. We expect that the next two increases in the federal funds rate will begin to exact pressure on both bond and mortgage rates after the Fed remained accommodative for far longer than necessary to stimulate demand-side growth. Additionally, we may look back at this jobs report as the catalyst that spurs four rate hikes in 2018. Although our forecast still calls for three increases next year, several headwinds are calming that could result in a more hawkish Fed.

Wage growth has been an albatross around the neck of this recovery, mitigating a potential steeper rate increase trajectory by the Federal Open Market Committee (FOMC). New leadership could result in a fresh examination of wage growth, which isn’t as bad as advertised relative to inflation. In November, wages grew 2.5 percent year-over-year, in line with the recorded results over the past 18 months. To keep this recovery in perspective, we need to keep in mind that interest rates, inflation and wage growth have all declined. As interest rates climb, we expect to see more predictable and familiar trends across the economy.

Homebuyers Should Take Advantage of Low Mortgage Rates Now

For residential real estate investors, November’s job report could have the biggest impact on the cost of capital. Although the FOMC has lifted rates four times thus far, the average 30-year mortgage rate from Freddie Mac is still hovering slightly below 4 percent. Essentially, mortgage rates have climbed less than half the amount the federal funds has been increased. As slack in the capital markets begins to tighten, the correlation between the two rates should increase, making today’s rates the most attractive investors could see during this cycle.

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