Jobs report has plenty of bad news for mortgage market

Non-bank mortgage employment slipped by nearly 5,000 people year-over-year in December, as the industry continues to wring out capacity.

But the mixed-bag macro employment picture is also not good news for an industry hoping for rate relief in the near-term, as the spring home purchase season approaches.

The mortgage business employed 266,000 people in December, compared with 270,700 jobs filled 12 months prior. The latest numbers, which are preliminary, are up from a revised 265,500 in November, the Bureau of Labor Statistics said. Prior data was revised as part of a benchmarking process, the BLS press release note said.

Industry employment has increased for four consecutive months and five of the last six.

But too much capacity remains in the mortgage industry for the current volume being produced, a recent report from Boston Consulting Group noted.

Mortgage industry data, which is derived from two lines in the BLS report, lags the overall statistics by a month.

In January, non-farm payrolls rose by 143,000 people, below the average monthly gain of 166,000 during 2024. That compared with the revised 307,700 jobs added in December.

The good news for mortgage servicers is that the unemployment rate edged down 4% from 4.1%. Job loss is a driver of mortgage delinquencies.

However, that is not-so-good news for those hoping the Federal Open Market Committee will resume its short-term rate cuts. While not directly impacting mortgage rates, those expectations are baked into investors' pricing of the 10-year Treasury, which is one of the benchmarks for residential real estate loans.

At 11 a.m. eastern time on Friday morning, the 10-year yield was up 6 basis points from its previous close, to 4.5%.

"January's mixed report reinforces the Federal Reserve's cautious approach as 2025 gets underway," said Sam Williamson, senior economist at First American, in a statement. "The Fed has emphasized the need for either 'real' inflation progress or 'some' labor market weakness before delivering additional rate cuts and the January jobs report provided neither, likely keeping rate cuts off the table until May/June at the earliest."

As a result, all borrowing costs, including those for mortgages are likely to remain elevated for an extended time frame, "reducing the potential for a strong housing market rebound in the Spring," Williamson said.

"Overall, mortgage rates are expected to drift modestly lower to the mid-to-low 6% range by year-end, though unexpected labor market or economic downturns could cause rates to fall more quickly."

Mortgage Bankers Association Chief Economist Mike Fratantoni also thinks the Fed will remain on pause, as at first glance, the data shows a job market that is still "reasonably" strong.

"However, there are several factors working to cloud this picture," he continued, including those substantial revisions to the past data. That showed a slower pace of employment growth during 2024.

Another adjustment added 2.9 million people to the population count in January, which Fratantoni considered to be a factor in pushing the unemployment rate lower.

"Finally, the wildfires in Los Angeles and severe winter weather events across the country, while not clearly impacting the results according to BLS, are another source of uncertainty," Fratantoni said, adding he now expects at most one more FOMC rate cut in the current cycle.

Another observer thinks market participants are fooling themselves if they are looking for the Fed to cut rates.

"Some investors are ignoring reality. The Fed has no reason to cut rates while inflation remains sticky," said Nigel Green, CEO of financial advisory the deVere Group, in a press release. "In fact, with Trump in the White House, we could see a new wave of inflationary pressures."

The president's economic policies, which includes aggressive fiscal spending, along with implementing protectionist tariffs that could lead to potential trade wars, could make inflation an even bigger issue, Green argued.

"The Fed's priority remains inflation, and until we see real evidence of a sustained decline, Powell will keep rates higher for longer, we expect," Green said. "The Fed isn't budging, inflation isn't disappearing, and markets are miscalculating the risks ahead."