Market Update – 12/7/2020

Disappointing job creations in November, as COVID cases spike

The news on job creations in November was disappointing, as the spike in COVID cases continues to impact people and businesses across the country. 

The closely watched Bureau of Labor Statistics report showed that there were 245,000 job gains in November, which was about half of market expectations. The Unemployment Rate did decrease from 6.9% to 6.7% – but unfortunately, the decrease was for the wrong reasons, as explained below. The ADP Employment report for November showed a gain of 307,000 jobs in the private sector, though this was also below estimates and a disappointment overall. 

The number of people filing for unemployment benefits for the first time did decrease in the latest week, as did the number of people continuing to receive benefits. Unfortunately, however, both declines were for the wrong reasons, as noted below. 

In housing news, Pending Home Sales, which measures signed contracts on existing homes, were down 1.1% from September to October. But the real story is the year-over-year data showing sales up 20.2% compared to October of last year. This is especially impressive, given that inventory is down 20% on an annual basis. Quite simply, low supply remains a challenge for homebuyers and if there were more homes on the market, there would have been more signed contracts. 

Home prices also continue to appreciate, as CoreLogic’s Home Price Index report showed that prices increased 1.1% from September to October and 7.3% when compared to October of last year. This annual reading is a big improvement from the 6.7% year over year appreciation figure reported for September. CoreLogic has also modified their forecasts for the year ahead, as noted below. 

Lastly, the latest ISM Index, which measures the health of manufacturing in the US, showed that we need to keep an eye on this sector in the coming months due to some signs of inflation. Remember, inflation is the enemy of fixed investments like Mortgage Bonds because it reduces their value. Home loan rates are tied to Mortgage Bonds, and while many factors influence the markets, it’s always important to monitor news about inflation.  

November Job Creations Fall Short of Expectations 

 bls jobs report

There were just 245,000 job gains in November, which was about half of market expectations, per the Bureau of Labor Statistics (BLS). 

Looking closely at the numbers, 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 there were 74,000 job losses.  

The Unemployment Rate decreased from 6.9% to 6.7%, which was stronger than expectations of 6.8%. Unfortunately, the decline was for the wrong reasons, as the labor force shrunk by 400,000 people. This is why the unemployment rate improved even though the Household Survey showed that there were 74,000 job losses. 

In addition, 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 0.4% higher or 7.1%. 

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 12.1% to 12.0%. 

Average hourly earnings decreased from 4.5% to 4.4% year over year. Average weekly earnings, which we focus on more, rose by 5.9%, up from 5.7%. See below why this is important when it comes to home prices and appreciation. 

Private Payrolls Also Below Expectations 


The ADP Employment Report, which measures private sector payrolls, showed that there was a gain of 307,000 jobs in November, which was lower than the 420,000 expected. October’s report was revised slightly higher by 39,000 additional jobs, from 365,000 to 404,000, but overall this report was a disappointment.  

After losing almost 20 million private jobs in March and April, we have only recaptured 10 million. Why are job gains fading? Unfortunately, the main reason is that companies are closing and the Paycheck Protection Program money that was keeping many of these companies afloat has run out.  

Jobless Claims Declining for Wrong Reasons 

 jobless claims

Another 712,000 people filed for unemployment benefits for the first time during the week ending November 28. While this is a decrease of 75,000 people from the previous report, the data is for Thanksgiving week when many people may not have filed. It’s also hard to make adjustments that are accurate to compensate for this.  

Continuing Claims, which measures people who continue to receive benefits, did improve by 569,000 to 5.520 million. Note that this figure is delayed a week and did not include Thanksgiving week.  

While the number of Continuing Claims has been improving in the past few weeks, it’s important to put this in perspective. When regular benefits expire, people can file for Pandemic Emergency Unemployment Compensation (PEUC), which extends their benefits another 13 weeks – and that figure increased by 60,000. While there is still a net benefit of 500,000 people dropping off of Continuing Claims, in most cases this is due to benefits expiring and not people returning to work. 

In addition, it’s estimated that by Christmas another 12 million individuals will see their benefits expire. Without a new stimulus plan, these people could face tremendous hardship. 

Low Supply Impacts Pending Home Sales 

 Pending Home Sales

Pending Home Sales, which measures signed contracts on existing homes, were down 1.1% from September to October. While this was less than the 2% monthly gain expected, sales were still up 20.2% compared to October of last year.  

The decline in signed contracts from September to October is not due to a lack of demand but a lack of supply, with the supply of existing homes down 20% when compared to October of last year. When you think about it, it’s quite impressive that sales are up 20.2% year over year while inventory is down 20%.  

Quite simply, if there were more homes on the market, there would have been more signed contracts. 

Appreciation Forecasts on the Move 

 CoreLogic HPI

CoreLogic’s Home Price Index report showed that home prices increased 1.1% from September to October and 7.3% when compared to October of last year. This annual reading is a big improvement from the 6.7% year over year appreciation figure reported for September. The hottest markets were Phoenix (+12.1%), San Diego (+8.3%) and Washington DC (+ 7.1%). 

Prices for single-family, detached homes rose by 7.9% year over year, while attached homes only rose by 4.5%. This supports the theme that condos are appreciating at a slower pace than standalone homes. 

CoreLogic forecasted that home prices will rise 0.4% from October to November and 1.9% in the year going forward, which is a huge revision to their 0.2% annual forecast in the previous report. Also of note, not that long ago, CoreLogic was expecting a negative 6.6% annual appreciation. 

Part of the change in forecast is related to something we’ve been discussing recently: birth statistics which show that the largest wave of millennials are heading into their prime homebuying years. As such, first-time buyers will be a big part of next year’s home purchases, which should continue for several years. 

Note also that the weekly earnings figure discussed above measures what people actually take home and it shows that this level of income can support much greater levels of appreciation than we are currently seeing without homes being unaffordable. People don’t use their entire income for their mortgage payment, so the weekly earnings figure does not have to rise at the same pace as appreciation. 

Family Hack of the Week  

Hot chocolate is always a crowd pleaser, especially this time of year. If you ever want to spice yours up, this easy recipe from Allrecipes is the perfect choice. 

In a saucepan, heat 6 cups of skim milk on medium low until its lukewarm. Add 3 tablespoons of unsweetened cocoa powder and 3 tablespoons of white sugar, stirring until dissolved.  

Next, add 1 teaspoon vanilla extract, 1 teaspoon of cinnamon, 1/4 teaspoon ground nutmeg and 1/4 teaspoon of ground cloves. And if you want to add an extra kick, also add 1/4 teaspoon chili powder. 

Heat for another five minutes, stirring occasionally, and then enjoy with your favorite baked goodie and holiday movie marathon! 

What to Look for This Week  

We’ll see a quiet start to the week when it comes to data, but the second half features several reports to note. Thursday brings the latest weekly Jobless Claims data, which remains important to monitor given the struggles in the labor sector. 

We’ll also get an update on consumer and wholesale inflation for November, starting Thursday with the Consumer Price Index, followed by the Producer Price Index on Friday. As noted above, these reports will be especially important to monitor due to the impact inflation can have on Mortgage Bonds and home loan rates, which are tied to them. 

Technical Picture 

The Fed continues to provide stability to the markets thanks to its ongoing purchases of Mortgage Backed Securities. Mortgage Bonds are trading in a very wide range between support at the 25-day Moving Average and overhead resistance at 103.953. 

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