Market Update – 11/30/2020

Unemployment for the first time hits a five-week high

The number of people filing for unemployment for the first time hit a five-week high, as Initial Jobless Claims reached 778,000 during the week ending November 21. This increase in new claims is likely a result of the spike in COVID cases. While the number of people continuing to receive regular benefits did decline, this unfortunately doesn’t mean the employment picture is improving, as explained below. 

New Home Sales, which measures signed contracts on new homes, were down 0.3% from September to October, but there’s more to that headline than meets the eye. Sales in October neared 1 million units, plus they were up a whopping 41.5% compared to October of last year. This was quite a remarkable feat given the big drop in inventory, which is down 13.4% year over year!  

Home prices continue to appreciate, lending more evidence to housing remaining the cornerstone of our economic recovery. The Case-Shiller Home Price Index, which is considered the “gold standard” for appreciation, revealed a 7% annual gain in home prices in September nationwide. Meanwhile, the Federal Housing Finance Agency (FHFA) House Price Index showed that home prices on single-family homes with conforming loan amounts rose 1.5% from August to September and are up 9.0% year over year. Tight supply and high demand certainly favor strong appreciation continuing in the months’ ahead. 

The second estimate of third quarter Gross Domestic Product (GDP) remained flat at 33.1% on an annualized basis, which was in line with expectations.  One important thing to note, however, is that the 33.1% gain in the third quarter does not erase the -31.4% drop in the second quarter. GDP would have to increase almost 46% to make back what was lost. And on a related note, the minutes from the Fed’s November 4-5 meeting showed that the Fed identified downside risks in the lack of fiscal stimulus and a resurgence of COVID, both of which could negatively impact GDP in the fourth quarter. 

Lastly, the Fed’s favored measure of inflation, Personal Consumption Expenditures (PCE), showed that inflation was tame in October. More about why that can be good news for Mortgage Bonds and home loan rates below. 

Initial Jobless Claims Reach Five-Week High 

 jobless claims

Another 778,000 people filed for unemployment benefits for the first time during the week ending November 21. This was an increase of 30,000 people from the previous week and a five-week high. New claims have increased over the past several weeks, likely due to the spike in COVID cases. California (+167K), Illinois (+65K) and New York (+47K) reported the largest increases. 

Continuing Claims, which are filed by people who continue to receive benefits, did improve by 300,000 to 6.071 million. While this number has been improving in the past few weeks, it’s important to remember that when regular benefits expire, recipients can file for Pandemic Emergency Unemployment Compensation (PEUC), which extends their benefits another 13 weeks.  

The number of PEUC claims increased by 132,000, so the drop in continuing claims is not as good as the headline would lead us to believe. Plus, the larger story here is that many people are reaching the point where their regular benefits are due to expire. As such, we will likely see the number of Continuing Claims continue to improve, but this doesn’t really mean the employment picture is getting better, unfortunately. 

Looking Past the New Home Sales Headline 

 new home sales

New Home Sales, which measures signed contracts on new homes, were down 0.3% and essentially flat from September to October. But that doesn’t tell the whole story.  

September’s sales figure was revised 4.5% higher and sales in October neared 1 million units. In addition, sales are up a whopping 41.5% compared to October of last year – even with the big drop in inventory, which is down 13.4% year over year! Low inventory remains a challenge, with just a 3.3 months’ supply of new homes available for sale at the end of October. Typically, 6 months of supply is considered a healthy housing market. 

The median home price increased to $330,600, up 2.5% year over year. Remember this is not the same as appreciation, which is near 7% as noted per the latest Case-Shiller data below. The median home price simply means half of the homes sold were above and half were below that price. 

September a Strong Month for Home Appreciation 

 case shiller hpi

The Case-Shiller Home Price Index, which is considered the “gold standard” for appreciation, showed that there was a 7% annual gain in home prices in September nationwide, up from an already strong reading of 5.8% in August. The 20-city Index rose from 5.3% to 6.6% when compared to September of last year, with all of the cities showing strong gains. Phoenix (+11.4%), Seattle (+10.1%) and San Diego (+9.5%) reported the highest annual gains among the 20 cities.  

The 7% national reading for appreciation means there is a huge opportunity in homeownership. For example, buying a $300,000 home that gains 7% in appreciation would mean a benefit of just over $21,000 in just one year on appreciation alone. The equity gain with amortization would be even greater. 

There was also news from the Federal Housing Finance Agency (FHFA) regarding home price appreciation on single-family homes with conforming loan amounts. Their House Price Index showed that home prices rose 1.7% from August to September and are up 9.0% year over year, even higher than the 8% reading in the previous report. Note that while, for example, you can have a million-dollar home with a conforming loan amount, the report typically represents lower-priced homes, where supply is tightest and demand is strongest. This is why the FHFA report shows even stronger annual appreciation than the Case-Shiller report. 

Will the appreciation trend continue?  

While single-family home construction is rising slowly, it is not even close to meeting the demand, especially in the lower-priced tiers. In addition, single-family building permits, which are an indicator of future construction, were basically flat in October, suggesting construction is not going to rise significantly in the winter months. This should exacerbate an already tight supply issue, with record low levels of inventory.  

In addition, demand should continue to rise due to demographics as, based on birthrates, we should see an increasing number of first-time home buyers enter the market over the next several years. 

Inflation Remains Tame 

Personal Consumption Expenditures, the Fed’s favored inflation measure, showed that headline inflation was flat in October and fell from 1.4% to 1.2% year over year. The Core rate, which strips out volatile food and energy prices and is the Fed’s real focus, was also flat in October while decreasing from 1.5% to 1.4% compared to October of last year.  

Why does tame inflation matter? 

Inflation reduces the value of fixed investments, like Mortgage Bonds, meaning rising inflation can cause Bonds to worsen or move lower. Home loan rates are inversely tied to Mortgage Bonds, so when Bonds worsen, home loan rates can rise. Though many factors influence the markets, tame inflation can benefit Mortgage Bonds and help home loan rates remain low.  

Family Hack of the Week  

The holiday season typically brings a bevy of wrapping paper and gift bags, and often a big pile of leftovers in the process. Save yourself the hassle of sorting through these items next year with these easy organization ideas from our friends at HGTV. 
Magazine racks are perfect for storing gift bags by holiday and event. Create decorative labels and you’ll easily be able to find wedding shower, birthday or holiday gift bags whenever you need them. Include matching tissue paper in each bag so you’ll have everything you need handy if you’re ever in a last-minute pinch. 
Suit and pants hangers also work wonders for keeping gift bags organized and in easy reach. They can hold multiple bags while also keeping them flat and in good shape. 
Tall laundry baskets can be repurposed into wrapping paper bins. The height will allow you to fit rolls large and small, and the handles will make it easy to carry your supplies around the house.  
Folding lawn chair bags can come in handy beyond the summer months. They make great storage cases for wrapping paper. Plus, the strap can easily be hung on a wall or closet door hook for space-saving efficiency.  
Lastly, don’t ignore your accessories. A plastic tote is great for storing things like gift tags, ribbon, tape and scissors.  

What to Look for This Week  

Housing news kicks off the week on Monday with Pending Home Sales for October, while we’ll get an update on manufacturing with the Chicago PMI and ISM Index for November on Monday and Tuesday, respectively.  

Then the labor sector will highlight the rest of the week. Wednesday brings the latest news on private payrolls with the ADP Employment Report for November. Look for the latest Initial Jobless Claims numbers as usual on Thursday, while Friday we’ll get the highly-anticipated Bureau of Labor Statistics Jobs Report for November, which includes Non-farm Payrolls and the Unemployment Rate, 

Technical Picture 

The Fed’s ongoing purchases of Mortgage Backed Securities continues to provide stability to the markets. After trading in a wide range, Mortgage Bonds moved close to a ceiling of resistance at 103.75. Meanwhile, the 10-year has broken beneath its 25-day Moving Average and has room to move lower until the next floor of support at its 50-day Moving Average.  

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