How the Unexpected Leads to the Expected

Lending rates were up this past week, though not discerningly so.

When we parse the national averages, we see the 30-year fixed-rate mortgage was up five basis points to 4.5%, according to . Freddie Mac's data show a slightly frothier gain, with the 30-year loan up nine basis points to 4.37%.

A rate increase was inevitable after the February employment report, which showed an unexpected lift in payrolls. Specifically, the Bureau of Labor Statistics (BLS) reported the economy added 175,000 jobs last month – 26,000 more than the consensus estimate. In addition, net revisions for the prior two months show 25,000 more jobs than initially reported.

The natural reaction (or the expected reaction) in the mortgage market was for rates to rise. We say that because the expected isn't what moves markets; it's the unexpected. What's expected is already baked into current market prices. When something unexpected occurs – such as the robust payroll numbers last week – markets move. In the case of interest rates, they moved up.

We expect job growth to pick up pace. Recent growth has been hampered by atypically inclement weather. People simply weren't getting out and about. More telling, though, is the number of job openings, which is trending higher. The BLS reports that the number of job openings rose to 3.974 million in January compared to 3.914 million in December. Year over year, openings are up 7.6% and are at 2005 levels.

The trend in job openings isn't a surprise when you look at the trend in capacity utilization rates , which reflects the extend to which factories, mines, and utilities are being used. The utilization rate is above 79%, the highest it has been in years. What's more, it has been trending higher since the second half of 2013.

More employees are needed to support higher utilization rates. In addition, the rise in utilization rates points to more robust growth all around. After all, factories, mines, and utilities support other businesses.

Our best estimate is for payroll growth to ratchet up to 200,000 by summer. Should that happen, and as it becomes apparent, higher payroll growth will get priced into interest rates.

In short, we stick to our prediction that the 30-year fixed-rate loan will approach 5% by December. In the meantime, borrowers can capture a 30-year loan with a rate in the mid-fours, which is still darn good from a long-term historical perspective.

 Courtesy of Jessica Regan.

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