Friday's "Catastrophic Surge" in Mortgage Rates

If you're thinking about buying a home, then you're probably not going to like what I'm about to say. On Friday, while you were busy nursing yourself back to life following the previous night's celebrations, mortgage rates exploded.

The daily recap from a widely followed mortgage industry publication characterized it as a "catastrophic surge," saying: "today's rise in mortgage rates is among the largest ever, and certainly the largest in the past 10 years. Today alone, rates rose more than most entire weeks."

According to its estimates, the rate on a conventional 30-year fixed rate mortgage "moved forcefully into 4.75% territory, with some lenders at 4.875%."

But wait a second. Didn't Freddie Mac just announce on Wednesday that rates had fallen? What could have happened in the meantime to cause them to take flight?

The answer is this: Friday's better-than-expected jobs report for June. As my colleague Morgan Housel noted, "Bad news for the end-of-the-world crowd: June's jobs report was released Friday, and it was pretty good. 195,000 new jobs were created last month, according to the Bureau of Labor Statistics. That was the third-best June jobs report in the last 15 years."

The connection between mortgage rates and job creation is the Federal Reserve. That is, as the labor market picks up, the central bank will begin to reduce its support for the economy. And because its support for the economy consists, in large part, of bond purchases, its retreat will result in higher interest rates.

As Mortgage News Daily put it (emphasis added):

Today's catastrophic surge higher was a direct effect of a stronger-than-expected Employment Situation Report, which not only showed June job creation to be better than expected, but revised the last two months into stronger territory as well. The more profound indirect consideration is the report's role as the key barometer for Fed policy. This is the reason the rise in rates of the last two months has been as sharp as it is.

All things considered, in turn, if you're a prospective homeowner, it might behoove you to act on your inclination to buy a house sooner rather than later, as there's reason to believe that this trend could very well continue.

And if you're an investor, it'd behoove you to follow these rates as well. This is particularly true for the nation's largest mortgage originators, among them Wells Fargo , JPMorgan Chase , Bank of America , and US Bancorp .

As I've discussed previously, all four of these banks benefit from noninterest income related to mortgage underwriting activity, which could be throttled because of the higher rates. But at the same time, these lenders will reap gains from the higher interest income on their securities portfolios. How these factors, as well as others, balance themselves out, in turn, will largely dictate both the price of bank stocks and the ability of lenders to increase their dividends over the foreseeable future.

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