Mortgage Rates Inch Down

July 1, 2021

Economic growth remains steady and is bolstering more segments of the economy. Although low and stable mortgage rates have kept the housing market booming over recent months, a deterioration in affordability and for-sale inventory has led to a market slowdown. Could be a summer lull as we see more people exercising their vaccines and beginning to travel again, maybe combined with buyer fatigue.

There were plenty of fireworks ahead of the Independence Day holiday, as key labor and housing reports showed strong job creations and sizzling home appreciation.

The highly anticipated Jobs Report from the Bureau of Labor Statistics (BLS) showed that there were 850,000 jobs created in June. This was stronger than expectations of 700,000 new jobs, and there were also slight positive revisions to April and May in the amount of 15,000 more jobs in those months combined. However, the Unemployment Rate actually ticked up from 5.8% to 5.9%, which has to do with the two different surveys within the report. Read on for more details regarding this.

Private sector job creations also beat expectations in June, as the ADP Employment Report showed a gain of 692,000 jobs, which was almost 100,000 more jobs than expected. However, May’s report was revised lower by nearly that same amount. Job gains were seen across all sizes of businesses, while leisure and hospitality jobs again led the way with 332,000 new jobs in that sector.

Initial Jobless Claims once again hit their lowest level since the pandemic began, dropping 51,000 in the latest week to 364,000. All in all, 14.7 million individuals are still receiving benefits throughout all programs, which is down 180,000 from the previous week. In addition, 22 states have opted out of additional state unemployment benefits, and these states are seeing people return to work at a better than 2-to-1 margin. However, real challenges remain for many families, especially parents who have lost access to important after-school programs and other childcare options.

Hot home prices shared headlines with the record-high temperatures across much of the country. Home prices rose 14.6% year over year in April, per the Case-Shiller Home Price Index. This is a 30-year high and even stronger than the 13.2% annual appreciation reported in March. The Federal Housing Finance Agency (FHFA), which measures home price appreciation on single-family homes with conforming loan amounts, also came in strong, with home prices up 1.8% from March to April and 15.7% year over year.

Despite low inventory and soaring appreciation, demand for homes remains strong around the country. Pending Home Sales, which measure signed contracts on existing homes, increased by 8% in May, which was well above the 1% decline expected. Year over year, Pending Home Sales are up 13%.

Lastly, over in the manufacturing sector, the ISM Index did decline to 60.6 in June, with labor challenges remaining a key hurdle to growth. However, any reading above 50 indicates expansion. In regional news, the Chicago PMI also fell in June, though the readings this spring have been strong overall.

June Job Creations Beat Expectations Yet Unemployment Rate Increases

The Bureau of Labor Statistics (BLS) reported that there were 850,000 jobs created in June, which was stronger than expectations of 700,000 new jobs. In addition, there were slight positive revisions to April and May in the amount of 15,000 more jobs in those months combined.

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 there were 18,000 job losses while the labor force increased by 151,000. The number of unemployed people also increased by 168,000, causing the

Unemployment Rate to rise from 5.8% to 5.9%.

June’s data is a perfect example of how the Jobs Report can be a tale of two reports, where we can see disparity in job creations between both surveys.

In addition, it’s important to further analyze these 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 that number equates to 1.6 million people. When we add this into the calculations, along with the 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), the real Unemployment Rate is around 7%.

Wages were on the rise, as average hourly earnings were up 0.3% in June after rising 0.5% and 0.7% in May and April, respectively. Year over year, these figures were up by 3.6%.

Average weekly earnings, which we focus on more because it measures what people actually take home, were basically unchanged after rising 0.5% and 1% in the previous two months. Average weekly earnings were unchanged due to the drop in hours, likely due to the manufacturing sector where there are not enough parts to keep people working. Year over year weekly earnings are up 4%, but if you extrapolate the last 3 months’ numbers over the course of the year, weekly earnings would increase by 6%.

And of note, leisure and hospitality wages increased by 1% month over month after rising more than 1% in May as businesses in those sectors ponied up to try to get much needed staff to return to work.

June Private Payrolls Higher Than Expected

The ADP Employment Report, which measures private sector payrolls, showed that there were 692,000 jobs created in June, which was almost 100,000 more jobs than expected. However, May’s report was revised lower by nearly that same amount, bringing the total number of jobs created in May from 978,000 down to 886,000.

Leisure and hospitality again led the way with 332,000 new jobs, while education/healthcare and trade/transportation/utilities added 123,000 and 62,000 jobs respectively. In total, the service-providing sector added 624,000 new jobs. The goods-producing sector added 68,000 jobs, with manufacturing adding 19,000 and construction adding 47,000.

Job gains were present across all sizes of businesses. Small businesses (1-49 employees) gained 215,000 jobs, mid-sized businesses (50-499 employees) gained 236,000 jobs, and large businesses (500 or more employees) gained 240,000 jobs.

After losing almost 20 million jobs during the pandemic, we have recovered back almost 13 million. However, there are still 7 million jobs that are unrecovered while there are 9.3 million job openings.

Initial Jobless Claims Tick Lower But Remain Elevated

The number of people filing for unemployment benefits fell by 51,000 in the latest week, as Initial Jobless Claims were reported at 364,000, which is a post-pandemic low. California (+57K), Pennsylvania (+26K) and Illinois (+20K) reported the largest number of claims.

However, the number of people continuing to receive regular benefits increased by 56,000 to 3.5 million.

Pandemic Unemployment Assistance Claims (which provide benefits to individuals who would not usually qualify) and Pandemic Emergency Claims (which extend benefits after regular benefits expire) fell by 28,000 combined.

All in all, 14.7 million individuals are still receiving benefits throughout all programs, which is down 180,000 from the previous week. In addition, 22 states have opted out of additional state unemployment benefits, and these states are seeing people return to work at a better than 2-to-1 margin. 

Extended benefits are supposed to fully expire after Labor Day and assuming they’re not extended again, we will likely see claims drop further. But the situation does remain complicated, especially for many families who need schools and childcare to fully reopen.

Pending Home Sales Soar Above Expectations

Pending Home Sales, which measure signed contracts on existing homes, increased by 8% in May, which was well above the 1% decline expected. Year over year, Pending Home Sales are up 13%.

Buyers are still lining up at a feverish pace, according to the National Association of Realtors chief economist, Lawrence Yun, who said, “While these hurdles have contributed to pricing out some would-be buyers, the record-high aggregate wealth in the country from the elevated stock market and rising home prices are evidently providing funds for home purchases.”

Appreciation Hits 30-Year High

The Case-Shiller Home Price Index, which is considered the “gold standard” for appreciation, showed home prices rose 14.6% year over year in April. This is a 30-year high and even stronger than the already hot 13.3% annual appreciation reported in March.

The 20-city index rose from 13.4% to 14.9% year over year, with almost all the cities showing strong gains. Phoenix (+22.3%), San Diego (+21.6%), and Seattle (+20.2%) continued to report 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. 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.

That’s why it’s not really a surprise that the data was even stronger than what Case Shiller reported. Home prices rose 1.8% in April and they were up a staggering 15.7% year over year, which is higher than the 14.1% annual appreciation reported for March.

What to Look for This Week

After the market closures Monday in honor of the Independence Day holiday, the rest of this week’s calendar is relatively quiet. The main highlights will come on Tuesday via the ISM Services Index for June, on Wednesday when the minutes from the Fed’s latest meeting are released, and on Thursday when the latest Jobless Claims data will be reported as usual.

Technical Picture

Mortgage Bonds are tangled in a web of resistance levels, formed by the 25-day, 100-day, and 50-day Moving Averages, while the 10-year is battling with support at 1.44%.