Mortgage Rates Fall for the Third Consecutive Week and the Jobs Report Doesn’t Matter
As rates fell for the third consecutive week, markets staged a rebound with increases in manufacturing and service sector activity. The combination of very low mortgage rates, a strong economy and more positive financial market sentiment all point to home purchase demand continuing to rise over the next few months.
Many felt that the strong jobs report earlier in the week was going to chase money back into the market and mortgage bonds would shoulder the brunt of that move. When the non-farm payroll came in stronger than expected and last month’s numbers were revised upward, I expected that mortgage rates would suffer. They did not and in fact, the mortgage bond market is rallying today. Stocks are down mid-day, which may just be attributable to profit taking, in which case, locking any loans today might not be the worst thing to do. Just depends on whether you are gambler or not.
Your Weekly Update Begins Here
The last week of January brought plenty of headlines, as housing data, inflation news and GDP were all released. On top of that there was a Fed meeting and growing fears regarding the coronavirus, which is spreading much more quickly than SARS did in the past. China has confirmed that the number of cases is now over 10,000 while the death toll has climbed above 200. The World Health Organization declared the virus a global health emergency and the U.S. has now seen the first case transmitted by one person to another. This news spooked global markets late last week.
And that’s not the only important “panic” to mention. Recently we noted that the Panic/Euphoria Model from Citigroup, which is a gauge of investor sentiment, was very close to euphoric levels. Reminder that the model identifies ‘Panic’ and ‘Euphoria’ levels which are statistically driven buy and sell signals for the broader market.
Historically, a reading below panic supports a better than 95% likelihood that stock prices will be higher one year later, while euphoria levels generate a better than 80% probability of stock prices being lower one year later. A reading at or above .41 is euphoria and last week hit .45.
Bottom line: The index is now in full Euphoria territory, so this will be important to monitor in the months ahead.
The Jobs Report Isn’t Impacting Mortgage Backed Securities
Stocks are lower and Mortgage Bonds are rallying following the release of the January Jobs Report. The Bureau of Labor Statistics (BLS) reported that there were 225,000 jobs created in the month of January, which was much higher than the160,000 expected. Additionally, there were 7,000 in positive revisions to the previous two months – November was revised higher by 5,000 from 256,000 to 261,000 and December was revised higher by 2,000 from145.000 to 147.000. This brings the 3-month average to 211.000.
The Unemployment Rate ticked up from 3.5% to 3.6%. Let’s take a look at why – There are two different surveys within the Jobs Report – The Business Survey, where the headline jobs figure is derived from, and the Household Survey, where the Unemployment Rate comes from. The Household Survey also has a job creation component, which said that there were 89,000 jobs lost – It’s always interesting to see the disconnect between the business and household surveys. In addition to the job losses in this survey, the labor force increased by 50,000. As a result, the unemployment rate rose to 3.6%.
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, moved increased from 6.7% to 6.9%. The labor force participation rate remained increased from 63.2% to 63.4.
Average hourly earnings increased from 2.9% to 3.1% year over year. The more important weekly earnings figure increased from 2.3% to 2.5% year over year.
Fed Sings the Same Tune
The Fed’s first meeting of 2020 brought little surprises as the Statement that was released Wednesday was exactly as expected. In a unanimous decision, the Fed left rates unchanged. They noted that the labor market remains strong, economic activity is rising at a moderate pace, job gains are solid, and unemployment remains low.
If you’re feeling a sense of deja vu, there’s good reason. Last week’s Statement was almost exactly the same as the Fed’s Statement in December.
The most important part of the Statement we were looking for was comments on the Fed’s Balance Sheet. The Fed reiterated that they plan on purchasing T-bills “at least through April 2020 to ensure that the supply of reserves remains ample.” They then said that once they get to a point where reserves are sustainable, they will gradually reduce their purchases.
It seems like the Fed will be purchasing Treasury Bills for quite some time.
Digging Deeper on Inflation
In its Statement, the Fed also said that inflation remains muted but is turning towards their 2.0% target. That seemed to be confirmed with the subsequent release of the Personal Consumption Expenditures (PCE) Report, which is the Fed’s favored measure of inflation and which showed that headline inflation increased from 1.5% to 1.6% in December.
The more important Core rate, which strips out volatile food and energy prices, was reported at 1.6%. Both of these readings were in line with expectations and little changed from the previous report.
It’s also important to note that the Employment Cost Index, which measures compensation for workers, was in line with expectations and up 0.7% in the 4th quarter of 2019. On an annual basis, the index is up 2.7%, which was just below the 2.8% in the 3rd quarter of 2019. This report was former Fed Chair Greenspan’s favorite measure of inflation and this data is in line with what we saw in the last Jobs Report which showed average weekly earnings up 2.6%.
So what’s the bottom line? Inflation does remain muted in the reports the Fed follows closely, which is good news for fixed investments like Mortgage Bonds and the home loan rates tied to them. But we do think it’s important to keep a close eye on the Consumer Price Index (CPI). As we have mentioned several times, we think that CPI is a much better read of real inflation because it has a higher weighting towards the cost of putting a roof over your head and out of pocket medical expenses. And the CPI is running much hotter at 2.3%.
CPI figures for January will be released February 13, and we’ll be watching closely to see if Mortgage Bonds and home loan rates love the data … or not.
Looking Beneath the Housing Headlines
The latest New and Pending Home Sales figures were released last week, and while the media latched onto negative headline numbers, important takeaway’s come from digging deeper here as well.
December New Home Sales were down 0.4% from November but are still up a very strong 23% year over year … something the media conveniently left out of many reports. The estimate of new houses for sale at the end of December was 327,000, which represents a healthy supply of 5.7 months at the current sales rate.
Meanwhile, Pending Home Sales, which measures signed contracts on existing homes and is a good leading indicator for Existing Home Sales, were down 4.9% in December. While this reading was weaker than the expectations of a slight gain, Pending Home Sales are still up 4.6% on an annual basis. Of course, the media focused on the 4.9% drop and headlines calling for the end of strong housing market surfaced shortly thereafter. The National Association of Realtors, however, attributed the pullback to purely a lack of supply. They went on to say that demand remains very strong and if there were more homes for sale, there would be a greater amount of sales. While this can make finding a home more difficult, it’s a good dynamic for your customers’ investment in their home. Tight supply and strong demand, as the first law of economics states, means that prices should move higher.
How fast are homes appreciating in the US? The Case-Shiller Home Price Index, which is considered the “gold standard” for appreciation, showed that home prices rose 3.5% November, which was a slight increase from 3.2% in October. The 20-city Index increased to 2.6% on a year over year basis from 2.2%. Phoenix (5.9%), Charlotte (5.2%), and Tampa (5.0%) led the gains, and the gains were broad based, with every city in the index seeing an increase.
Usually, the media cites the median home price when they claim housing is accelerating too quickly for incomes. Instead, appreciation is what we need to pay close attention to. And the 3.5% appreciation we are seeing nationally is still meaningful, but not too hot to outpace incomes and make homes unaffordable.
Hold That Housing Dial
Not to be outdone in an already full news week, Black Knight also shared some interesting stats on the health of the housing market:
- Mortgage delinquencies fell by nearly 4% month-over-month to within 0.04% of the record low set in May 2019 and more than 12% below last year’s level
- The national foreclosure rate fell again in December to reach a new 14-year low, and the lowest on record outside the final five months of 2005
- 2019 ended with just over two million borrowers past due on their mortgage (including active foreclosures) – down 236,000 from the same time last year and the lowest year-end volume since the turn of the century
All in all, despite what the media may focus on, the housing market is rolling along as we head into 2020.
Technical Breakdown
Mortgage Bonds have been in a clearly defined upward trend since January 19th. Last week they tested an overhead ceiling of resistance at 102.25, but to confirm a break above it the last two attempts. Bonds are now in a wide range and could be susceptible to price swings. Bonds will likely take their cue from the Stock market. If Stocks sell off, Bonds will likely test overhead resistance again and potentially break above it. If Stocks regain some of Friday’s losses, it may apply pressure to the Bond market.
