Mortgage Rates Hit All-Time Record Low Heading into Last Week’s Holiday Weekend
Freddie Mac Primary Mortgage Market Survey – July 2, 2020
Mortgage rates continue to slowly drift downward with a distinct possibility that the average 30-year fixed-rate mortgage could dip below 3 percent later this year. On the economic front, incoming data suggest the rebound in economic activity has paused in the last couple of weeks with modest declines in consumer spending and a pullback in purchase activity.
Week of June 29th, 2020 in Review
The July 4 holiday provided plenty of fireworks around the country, as did last week’s busy economic calendar. All eyes were on the labor sector, as three key reports were released.
First up, the ADP Employment Report showed 2.37 million job gains in the private sector during the month of June. Though this was lower than anticipated, May’s report was revised to the positive, moving from a net job loss to job gains. The more-closely watched Bureau of Labor Statistics report showed 4.8 million job gains in June, beating expectations of 2.9 million job creations. The Unemployment Rate decreased from 13.3% to 11.1%, though this figure would have been 12.1% without the classification error noted below.
The latest weekly Initial Jobless Claims showed that another 1.427 million people filed for benefits for the first time during the week ending June 27. While this was in line with expectations, it’s still a startling number to digest.
Housing was in the news as well, as May’s Pending Home Sales saw a huge rebound while home prices continued to appreciate in April per the Case Shiller Home Price Index.
Also of note, the ISM Index, which measures the health of the manufacturing sector in the US, came in at 52.6 for the month of June, which was above expectations of 49.0. However, manufacturing in the Chicago region saw just a slight rebound in June, per the Chicago PMI, after hitting a 38-year low in May.
Lastly, the minutes from the Fed’s meeting on June 9-10 were released and they showed discussion around Forward Guidance, Asset Purchases, and Yield Curve Control. Participants voiced concern over the prospect of Yield Curve Control and adoption seems unlikely at this time. Fed officials also noted that the fiscal help provided by Congress ‘might prove to be insufficient.’
June’s Employment Reports Show Job Gains
Both the ADP and BLS employment reports showed job gains in June. First in on Wednesday was the ADP Employment Report, which revealed that there was a gain of 2.37 million jobs in the private sector. While this was less than the expected 3 million job gains for June, May’s figure was revised higher from 2.76 million job losses to 3.065 million job gains.
Hospitality industry workers saw the biggest gain, with 961,000 hires, which makes sense as more states began re-opening. Small businesses overall also added 937,000 jobs.
The more-closely anticipated Bureau of Labor Statistics report came out on Thursday, a day earlier than usual due to the market closures on Friday, and it showed that there were 4.8 million job gains in June. This was much stronger than the 2.9 million expected.
There are two reports within the Jobs Report, and there is a fundamental difference between them. The Business Survey is where the headline job number comes from and it’s based predominately on modeling.
The Household Survey, where the Unemployment Rate comes from, is done by actual phone calls to 60,000 homes. It also has a job loss or creation component, meaning it may be more reflective of actual job numbers – and it came in slightly higher than the headline number, showing 4.94 million job gains.
The Unemployment Rate decreased from 13.3% to 11.1%, which was stronger than expectations of 12.3%. What explains the decrease? While there were 4.94 million job gains, 1.7 million people entered the labor force, which is why we saw the unemployment rate decrease.
It’s important to note that there has been a misclassification error where people were classified as absent from work for other reasons and not marked as unemployed on temporary layoff when they should have been. Without this error, the unemployment rate would have been 1% higher or 12.1%.
The all in U6 Unemployment Rate, which includes total unemployed, plus all persons marginally attached to the labor force, plus total employed part time for economic reasons, decreased from 21.2% to 18%.
Average hourly earnings decreased from 6.7% to 5%, while average weekly earnings decreased from 7.7% to 5.3%. Part of the reason for the weekly decrease was a decline in hours worked of .2.
Initial Jobless Claims Remain High
Another 1.427 million people filed for unemployment benefits for the first time during the week ending June 27. While this figure was in line with expectations, it is still staggering to think about. California (+279K), Georgia (+115K) and Texas (+96K) reported the largest gains.
Continuing claims, which measure people continuing to receive benefits, have been persistent and were little changed at 19.29 million.
When we factor in the amount of new and continuing claims and the number of people in the labor force, we estimate that the real-time unemployment rate is around 15%. And when we try to estimate how many new jobs the Paycheck Protection Program has temporarily created, we think that the unemployment rate could be about 3% higher or closer to 18% without it. This figure correlates more closely with the all in U6 number as noted above.
Pending Home Sales Sets Record
Pending Home Sales, which measures signed contracts on existing homes, bounced back strongly in May, rising 44.3%. This was the highest month-over-month gain on record. But, before we start celebrating, keep in mind that April’s reading fell by 22% and March saw a decline of 21%.
In addition, for perspective, the index level of 99.6 compares with 111.4 in February and 108.9 in January. So, although recovery is underway, sales are still down 5.1% year over year.
The National Association of REALTORS’ chief economist, Lawrence Yun, said, “This has been a spectacular recovery for contract signings, and goes to show the resiliency of American consumers and their evergreen desire for homeownership.” He also noted that, “This bounce back also speaks to how the housing sector could lead the way for a broader economic recovery.”
A Quick Note Regarding Home Appreciation
The Case-Shiller Home Price Index, which is considered the “gold standard” for appreciation, was released for April. Of its various indexes, two are especially important to note.
First, the National Index, which covers all nine U.S. Census divisions, reported a 4.7% annual gain in April, which was an increase from 4.6% in March. Meanwhile, the 20-city Index increased from 3.9% in March to 4% in April on a year-over-year basis. Phoenix, Seattle and Minneapolis reported the highest year-over-year gains.
What to Look for This Week
After the fireworks from last week, this week’s calendar is relatively quiet. The main highlight will be the latest weekly jobless claims figures when they’re reported on Thursday. We’ll also get a read on wholesale inflation for June via the Producer Price Index on Friday. And there will be a 10-year and 30-year Treasury Auction that could impact the markets, depending on participation.
Technical Picture
The Fed’s ongoing purchases of Mortgage Backed Securities continue to add stability to the markets. Mortgage Bonds are trading in a range between support at the 25-day Moving Average and overhead resistance at 104.281. Bonds did test this resistance level last Tuesday but were pushed lower. However, they held their own in the face of the strong Jobs report from the BLS on Thursday and did not react negatively.