A strong jobs market and low unemployment probably seem like good news across the board, right? The tough reality, however, is that I’ve witnessed over the years that it can be a mixed bag for homebuyers.
First, let’s consider the data. The Bureau of Labor Statistics (BLS) employment data for May show the United States added 172,000 nonfarm payroll jobs, which was significantly better than expectations. The unemployment rate was unchanged at 4.3%.
The BLS May Employment Situation report also published updated April and March employment numbers. Previous April and March numbers came in at 115,000 and 185,000, respectively — but the revised numbers are 179,000 and 214,000.
Sounds pretty good, right? So what’s the catch? The surface data masks an important divide among homebuyers.
Job growth helps certain Americans afford homes
When people lose jobs, it’s not just that they might struggle to afford a home — it’s that a mortgage lender may not even approve their application. Lenders look at your employment history and debt-to-income ratio for proof that you’re likely to keep up with monthly mortgage payments.
But when more Americans have jobs, they’re more likely to be able to buy homes. This fuels housing demand. However, the key is that the jobs need to pay Americans enough that they can actually afford a down payment, closing costs, and monthly mortgage payments.
Related: More on mortgage rates
“Average hourly earnings rose 3.4% year over year in May, slipping from 3.6% last month— and with CPI expected around 4.2% when it lands [on June 10], real wages remain negative and are moving in the wrong direction,” wrote Jake Krimmel, Senior Economist at Realtor.com.
The Zillow May Market Report declared that the housing recovery was cooling down due to high mortgage rates. Annual new inventory dropped by 4.1%, and sales fell by 2.9%. These problems could persist if inflation grows faster than wages and mortgage rates remain relatively high.
Mortgage rates are hovering just below 6.5%, according to Freddie Mac, and the BLS employment data could lead to more increases.
High mortgage rates hurt affordability
As a general rule, mortgage rates tend to decrease when the economy is struggling and increase when the economy is thriving. This is due to various factors, one being that lenders lower rates when the economy is bad to encourage Americans to borrow money, then raise rates when the economy is good to tamp down borrowing.
Since monthly employment numbers continue to rise, and May job openings exceeded expectations, there’s a decent chance that mortgage rates will increase in response. Or at least stay relatively flat at around 6.5%.
More on mortgage rates and the housing market:
- Americans face decision after mortgage rate news
- Fannie Mae makes bold housing market prediction
- Homebuyers face opportunity with underrated strategy
To add fuel to the fire, the Federal Reserve meeting is June 9-10.
“A strong jobs report is indicative of a healthy economy — with good economic data, it becomes more difficult for the Fed to justify cutting rates,” Sarah DeFlorio, Vice President of Mortgage Banking at William Raveis Mortgage, told TheStreet. “Of course, we cannot get the whole story from one report, so everyone will be tracking the next few months closely to see if this is sustained.”
A Redfin analysis suggested that, along with inflation, the report might spur the Fed to discuss upping its rate in the near future.
The possibility of a fed funds rate hike in the near future would hurt public sentiment, which could very well lead to an uptick in mortgage rates.
So, the latest employment data is tricky. On the surface, more jobs means more people have the income and qualifications to get a mortgage. But if their jobs don’t pay well and interest rates continue increasing, will they actually be able to afford homes?
Tips for affording a mortgage loan
Between conflict in the Middle East and questions about what the Fed will do this year, there is a lot of uncertainty impacting the housing market right now.
“For homebuyers, times of uncertainty can be beneficial as many potential buyers choose to sit on the sidelines,” DeFlorio told TheStreet. “Recently, we have seen increased inventory and downward pressure on pricing, which has also helped affordability.”
Here are tips for taking advantage of this temperamental time in the housing market while ensuring you can truly afford a mortgage loan.
- Calculate your DTI ratio. Many lenders prefer that your monthly housing payments make up 28% or less of your pre-tax income, and 36% of all debt payments take up your monthly income. Calculating your DTI ratio will help you know whether your wages are high enough to comfortably afford a home and be approved for a loan.
- Buy mortgage discount points. Want a lower mortgage rate for lower monthly payments? You can pay for a permanent rate discount at closing or a temporary reduction with a rate buydown program.
- Get creative about your home-buying strategy. It’s becoming more common for Americans to co-buy houses with family and friends. Combining two or more incomes helps you qualify to borrow more money.
- Shop for mortgage lenders. By comparing multiple lenders, you can find the best deal. Freddie Mac research found that getting more than one quote could save homebuyers $600-$1,200 per year.
