Mortgage Rates Little Changed
Although mortgage rates remain low, we are beginning to see a pullback by those looking to enter the housing market. In fact, homebuyer demand has gone from 25% above pre-COVID levels at the start of the year, when mortgage rates hit record lows, to 8% above pre-COVID levels today. We even see that purchase demand is diminished today as compared to late May and early June of 2020, when mortgage rates were the same level. This is confirmation that while purchase demand remains strong, the marginal buyer is feeling the affordability squeeze resulting from the increases in mortgage rates and home prices we’ve experienced in recent months.
Week of March 29, 2021 in review
Last week may have brought April Fools’ Day, but thankfully the strong job and home appreciation reports were no joke!
Job creations rose sharply in March, as the Bureau of Labor Statistics reported 916,000 new jobs were created, which was even stronger than the 675,000 expected. There were also positive combined revisions to January’s and February’s figures, totaling an additional 156,000 jobs in those months. The Unemployment Rate did tick down from 6.2% to 6%, but the real unemployment rate is actually higher, as explained below.
The private sector also saw strong job gains in March, per the ADP Employment Report, which showed a gain of 517,000 jobs. This was in line with expectations and the best level of hiring in six months.
The latest weekly Jobless Claims report showed that the number of people filing for unemployment benefits for the first time increased in the latest week, though the number of people continuing to receive both regular and pandemic-related benefits did decline. However, the total number of people continuing to receive benefits throughout all programs remains so much higher than a year ago, underscoring that our recovery still has a way to go.
Over in the housing sector, Pending Home Sales, which measure signed contracts on existing homes, fell 10.6% from January to February. The decline was due in large part to inventory of available homes being 30% lower than it was in February of last year. Demand for homes remains strong and, quite simply, if there were more homes available there would have been more sales.
Low inventory has also helped home prices continue to show strong appreciation gains. The Case-Shiller Home Price Index, which is considered the “gold standard” for appreciation, accelerated to a 15-year high in January, up 11.2% year over year on the national reading. The Federal Housing Finance Agency (FHFA) House Price Index, which measures home price appreciation on single-family homes with conforming loan amounts, also came in hot, with home prices up 1% from December to January and 12% compared to January of last year.
March Job Creations Much Greater Than Expected
The Bureau of Labor Statistics (BLS) reported that there were 916,000 jobs created in March, which was stronger than the 675,000 expected. The leisure and hospitality and construction sectors led the way on job gains. In addition, there were positive combined revisions to January’s and February’s figures, totaling an additional 156,000 jobs in those months.
Note that 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, and it showed that there were 609,000 jobs created. We did see improvements in the Unemployment Rate, as it decreased from 6.2% to 6%. On the one hand, this decline was for the right reasons. While there were 609,000 job gains, the labor force increased by 347,000. Because there were so many more job gains than people joining the labor force, the unemployment rate moved lower.
However, it’s important to break down the numbers, as the true unemployment rate is actually higher than the headline figure. That’s because people who are not able to look for work due to pandemic reasons, and who are still unemployed, are not counted – and this number is at 3.7 million people. When we add this into the calculations, the real Unemployment Rate is 8.4%.
In addition, there has been a lingering misclassification error where people were classified absent from work for other reasons and not marked as unemployed on temporary layoff when they should have been. Without this error, the headline Unemployment Rate would have been 0.4% higher or 6.4%, while the real Unemployment Rate counting those unable to look for work due to pandemic reasons would be closer to 8.75%.
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, improved from 11.1% to 10.7%.
Average hourly earnings are up 4.2% year over year, which is down from 5.3% in the previous report. Average weekly earnings rose 6.7%, which is an increase from 6% in February’s report. Weekly earnings measure what people actually take home, so the increase represents some nice gains.
Private Sector Job Gains Reach 6-Month High
The ADP Employment Report, which measures private sector payrolls, showed that 517,000 jobs were created in March, which was in line with the strong job gains that were expected and the best level of hiring in six months! February’s report was also revised higher by 59,000 jobs, increasing the job gains in that month from 117,000 to 176,000.
The leisure and hospitality sector led the way in March with 169,000 new jobs, while the service sector added 437,000 new jobs in total.
There were also job gains across all sizes of businesses. Small businesses (1-49 employees) gained 174,000 jobs, mid-sized businesses (50-499 employees) gained 188,000 jobs, and large businesses (500 or more employees) gained 155,000 jobs. It was especially encouraging to see the gains among small businesses, which have been so heavily impacted by the pandemic.
Jobless Claims Still Elevated
The number of people filing for unemployment benefits increased by 61,000 in the latest week, asInitial Jobless Claims rose to 719,000. California (+105K), Texas (+84K) and Ohio (+54K) reported the largest number of claims.
Continuing Claims, which measure people continuing to receive benefits, did decline by 46,000 but they are still elevated at 3.8 million. Pandemic Unemployment Assistance Claims (which provide benefits to people who would not usually qualify) and Pandemic Emergency Claims (which extends benefits to people after regular benefits expire) also decreased by 500,000 and 700,000, respectively.
All in all, 18.2 million people are still receiving benefits throughout all programs, and while this is down 1.5 million from the previous week, it is still significantly higher than compared to the 2 million people receiving benefits in all program at this time last year.
Low Inventory Limits Pending Home Sales
Pending Home Sales, which measure signed contracts on existing homes, fell 10.6% from January to February and they were essentially flat compared to February of last year. The real story remains low inventory, which is down 30% year over year and the reason sales are lower.
Lawrence Yun, chief economist for the National Association of REALTORS�, explained, “The demand for a home purchase is widespread, multiple offers are prevalent, and days-on-market are swift but contracts are not clicking due to record-low inventory.”
Quite simply, if more homes were available, we would see more sales.
Home Price Appreciation Reaches 15-Year High
The Case-Shiller Home Price Index, which is considered the “gold standard” for appreciation, accelerated to a 15-year high in January, up 11.2% year over year on the national reading. This is an increase from December’s reading of 10.4%.
The 20-city index rose from 10.2% to 11.1% year over year, with almost all of the cities showing strong gains. Phoenix (+15.8%), Seattle (+14.3%), and San Diego (+14.2%) reported the highest annual gains among the 20 cities.
The Federal Housing Finance Agency (FHFA) also released their House Price Index, which measures home price appreciation on single-family homes with conforming loan amounts. Note that while you can have a million-dollar home with a conforming loan amount, the report most likely represents lower-priced homes, where supply is tightest and demand is strongest.
It should be no surprise that the FHFA appreciation reading was even stronger than Case Shiller’s, as FHFA reported that home prices rose 1% in January and are up 12% year over year. This annual reading was even stronger than December’s annual reading of 11.5% appreciation.
What to Look for This Week
The economic calendar is relatively quiet this week, with manufacturing news kicking things off on Monday when the ISM Index for March is released. Wednesday brings the minutes from Fed’s March Federal Open Market Committee meeting, while Thursday we will see the latest Jobless Claims data. Ending the week on Friday, we’ll get an update on wholesale inflation with the Producer Price Index for March.
Technical Picture
Mortgage Bonds have fallen beneath the 102.632 Fibonacci Level. It’s likely they would have moved even lower on Friday if the Stock market hadn’t been closed for Good Friday, as Stocks and Bonds often compete for the same investment dollar and strong job data is typically Stock friendly. There is more room to the downside until Mortgage Bonds reach the next floor at 102.281, so it will be important to keep a close eye on them as this week begins.
