Employment growth data shows strength with cooling inflation signals
The March jobs report delivered a surprise, with total nonfarm payroll employment increasing by 303,000, exceeding consensus forecasts of 200,000 job gains.
“On the surface and under the hood, this was a Goldilocks jobs report. Strong payroll growth, but the growth was non-inflationary – year-over-year wage growth is slowing, labor participation is up,” said First American deputy chief economist Odeta Kushi (pictured).
Data from the Bureau of Labor Statistics revealed that the unemployment rate held steady at 3.8%, while the labor force participation rate ticked up slightly to 62.7%.
Impact on Fed policy
The strong jobs report, coupled with inflation remaining above the Federal Reserve’s 2% target, may make the central bank reluctant to cut interest rates, according to Kushi.
“Investors may see another strong jobs report as further evidence that rate cuts may not be imminent. At the end of 2023, the market was expecting that the Fed would cut rates six to seven times in 2024,” she said. “However, with the economy and labor market proving resilient and inflation remaining stickier than anticipated, the Fed seeks further assurance that inflation is headed sustainably towards its 2% target. As a result, expectations for rate cuts have crashed, and the majority expect three or fewer rate cuts this year.”
Mike Fratantoni, chief economist at the Mortgage Bankers Association, agreed. “This report will bolster the case for the FOMC to hold off on any rate cuts in the near term, which will keep mortgage rates elevated for now,” he said.
Mortgage rate outlook
The resilient labor market and sticky inflation could translate to higher mortgage rates in 2024 than previously expected.
“With the market believing that rates will stay ‘higher for longer’, mortgage rate expectations have drifted higher for 2024,” Kushi said.
Fannie Mae, for example, anticipates 30-year mortgage rates finishing 2024 at 6.4%, compared to an earlier forecast of 5.8%.
“Holding income constant and assuming a 20% down payment, the difference between a 6.4% mortgage rate and a 5.8% mortgage rate equates to a loss of $29,000 in house-buying power. It is important to note that a 6.4% mortgage rate is still lower than today’s rates, so buyers sitting on the sidelines may still see a house-buying power boost by the end of the year.”
Construction sector strength
Construction employment also saw notable gains in March, adding 39,000 jobs. Residential construction jobs have reached their highest level since 2007, while non-residential construction jobs have reached a record high. This reflects a positive trend in housing supply.
“Within the housing industry, employment growth was strongest for non-residential and residential specialty trade contractors,” Kushi noted. “With existing homeowners rate-locked into their homes and not enough homes on the market, consumers may decide to renovate their own homes instead. Just like home construction, you need more hammers at work to renovate homes.”
Read more: Home listings slow during Easter, will trend continue?
“More housing supply is on the way in future months. More jobs mean more potential housing demand in the future,” said Lawrence Yun, chief economist of the National Association of Realtors. “But more jobs also mean the interest rate decline could stall as the Federal Reserve re-evaluates inflation risk.
“Overall, mortgage rates will likely remain unchanged, with no further measurable declines in upcoming months. High budget deficits will also hinder interest rates from falling as government borrowing crowds out mortgage funding availability. Even so, multiple offers on properties are still happening. Homeowners with record-high housing wealth should understand the favorable environment for putting homes on the market.”
Stay updated with the freshest mortgage news. Get exclusive interviews, breaking news, and industry events in your inbox, and always be the first to know by subscribing to our FREE daily newsletter.
