August 11, 2020
The resilience of the housing market continues as mortgage rates hit another all-time low, giving potential buyers more purchasing power and strengthening demand. We expect rates to stay low and continue to propel the purchase market forward. However, the main barrier to rising demand remains the lack of inventory, especially for entry-level homes.
Week of August 3rd, 2020 in Review
Last week was all about the labor sector, as two key employment reports for July were released. In the private sector, job creations slowed significantly in July per the ADP Employment Report, with only 167,000 new jobs added last month. However, there was a bright spot with June’s figures revised sharply higher.
Meanwhile, the highly-anticipated Jobs Report from the Bureau of Labor Statistics (BLS) showed that there were 1.8 million job gains in July, which was better than expected. The report also showed that the unemployment rate improved. However, the headline numbers don’t tell the whole story, as detailed below.
The latest Initial Jobless Claims showed that another 1.2 million people filed for unemployment for the first time during the week ending August 1, which was the first decline we’ve seen in several weeks. Continuing claims also improved in the latest week, but the figures still remain astonishingly high.
CoreLogic’s latest Home Price Index Appreciation report showed that home prices rose 1.0% from May to June and 4.9% when compared to June of last year. The annual gain was also up from the 4.1% year-over-year appreciation reported in May’s report. Perhaps most significant is the improvement in the forecast for home prices in the year ahead, which is noted below.
And there was some positive news from the manufacturing sector, as the ISM Index, which measures the health of US manufacturing, came in at 54.2 for the month of July, which was above expectations of 53.5. While production remains below pre-pandemic levels, readings above 50 do indicate growth.
Digging Deeper into July Jobs Reports
Both the ADP and BLS Jobs Reports for July had some important details to note behind the headline figures. First in on Wednesday was the ADP Employment report, which showed a gain of only 167,000 jobs in the private sector. This was much lower than the 2 million new jobs that were expected. However, June’s report had a huge revision from 2.4 million to 4.3 million jobs created in that month.
The more-closely anticipated BLS report showed that there were 1.8 million job gains in July, which was stronger than the 1.5 million that was 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. The Household Survey also has a job loss or creation component, meaning it may be more reflective of actual job numbers, and the Household Survey showed that there were 1.35 million job gains in July (as compared to the 1.8 million job gains reported in the Business Survey).
The Unemployment Rate decreased from 11.1% to 10.2%, which was stronger than expectations of 10.5%. While the Household Survey showed 1.35 million job gains, the labor force remained stable at around 160 million people, which is why we saw the unemployment rate improve.
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 18% to 16.5%.
But these numbers don’t tell the whole story.
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 11.2%.
Also of note, the number of persons not in the labor force who currently want a job declined by 463,000 to 7.7 million in July. These individuals were not counted as in the labor force or unemployed because they were not actively looking for work during the last 4 weeks or were unavailable to take a job. Why would they not be looking? Maybe they are in a field where they cannot yet return to work, are afraid to work because of the pandemic, or they are not incented because of the additional stimulus.
When we factor in this group of people, the real unemployment rate is likely 14.3% (15.3% with the misclassification error). All in all, while July did bring an improvement in job creations, it’s also important to understand that the unemployment rate really is higher than what’s being reported.
Lastly, average hourly earnings increased slightly from 4.5% to 4.8% year over year, while average weekly earnings remained at 5.4% year over year.
Initial Jobless Claims Fall in Latest Week
Another 1.2 million people filed for unemployment for the first time during the week ending August 1. While this remains a staggering number, it was about 250,000 less than the previous week and the first improvement we’ve seen among first-time filers in several weeks. California (+228K), Florida (+74K) and New York (+74K) reported the largest gains.
Continuing claims, which measure people who continue to receive benefits, also improved in the latest week by 844,000 to 16.1 million.
Pandemic Unemployment Assistance Claims (PUA), which are not captured in the headline figure, totaled 656,000 in the latest week. These claims are filed by people like gig workers and contractors who would not usually be approved for unemployment benefits. Continuing PUA Claims improved 70,000 to 13 million.
All in all, the total number of people receiving some type of benefit is likely over 30 million, which is still very high and would point to a much higher unemployment rate than what we are seeing reported, as noted above.
Promising Change to Forecast for Home Price Appreciation
Home prices rose 1.0% from May to June and 4.9% when compared to June of last year, per CoreLogic’s Home Price Index Appreciation report. The annual reading was up from May’s 4.1% annual increase. The states with the highest annual increases were Idaho (10.5%), Montana (9.8%), Missouri (8.5%) and Arizona (8.5%).
However, the big story was the forecast, as CoreLogic projects that home prices will increase 0.1% from June to July and they expect prices to fall 1.0% in the year going forward. Their annual forecast increased significantly from a negative 6.6% in the next 12 months.
CoreLogic noted that last month’s HPI Forecast of a 6.6% home price decline through May 2021 has been revised as projected unemployment rates through 2020 showed improvement. The recent rebound of home sales suggests the pandemic did not derail home buyers, who continue to be motivated by historically low mortgage rates. This, coupled with the declining supply of homes for sale, could shield home price growth from the impacts of the current economic uncertainty.
What to Look for This Week
We’ll get an update on July inflation this week, first on Tuesday with the Producer Price Index, which measures wholesale inflation. The Consumer Price Index follows on Wednesday.
Tuesday also brings the latest news from the National Federation of Independent Business with their small business optimism index for July, while Friday will show us how retailers fared in July with the Retail Sales report.
Finally, the latest jobless claims figures remain important to monitor when they are released as usual on Thursday.
The Fed continues to stabilize the markets with its ongoing purchases of Mortgage Backed Securities. Mortgage Bonds challenged overhead resistance at 103.688 but were pushed lower. Bonds are in a wide range with support almost 40bp beneath present levels.