Initial jobless claims fell to an annualized rate of 323,000 for the week ended August 30
Initial jobless claims are one of the few labor market indicators released every week.Â UnemploymentÂ is a profound driver of economic growth, and persistent unemployment has been the Achillesâ€™ heel of this recovery. While it seems like the big layoffs are largely finished, firms are still reluctant to add staff aggressively. Aside from the Hurricane Sandyâ€“influenced spike in late October, initial jobless claims have been holding steady in the 340,000-to-380,000 range.
Historically, real estate prices have tracked very closely with incomes. In fact, up until the real estate bubble burst, the ratio of median home price to median income remained in a relatively tight range of 3.2x to 3.6x. So if unemployment is rising, thereâ€™s little upward pressure on wages, which tends to be negative for home prices. Plus, the unemployed are unable to qualify for a mortgage, so the pool of buyers shrinks.
Initial jobless claims are back to pre-bust normalcy
Before the housing bust, initial jobless claims averaged around 356,000 from 1990 to 2007. This doesnâ€™t indicate a healthy economy, where claims are below 300,000. Given that some of the economic indicators are starting to turn downward, initial jobless claims may rise again.
For all the fears about increasing unemployment Â from the sequester, so far there has yet to be any visible effect. The homebuilders noted that skilled construction workers are in short supply, and that theyâ€™re having to pay up for talent. This bodes well for the labor market going forward.
The bond market has been selling off globallyÂ since May 1. Ben BernankeÂ added fuel to the fireÂ when he disclosed that the default path for the Fed is to start pulling back purchases this year with an eye towards fully endingÂ quantitative easingÂ by mid-2014. Since then, the mortgage REIT sector has been underÂ severeÂ pressure.
(Read more: Bonds and REITs collapse on FOMC statement)
Impact on mortgage REITs
Non-agency mortgage REITs, such as Chimera (CIM), PennyMac (PMT), or Two Harbors (TWO), which invest in non-governmentâ€“guaranteed mortgage-backed securities, are sensitive to the economy, asÂ delinquenciesÂ and defaults can influence returns. The unemployment rate is by far the biggest driver of defaults. Agency REITsâ€”such as Annaly (NLY) or American General (AGNC)â€”that invest in Ginnie Mae (government-guaranteed) or conforming (Fannie Mae, government-sponsored) mortgage-backed securities consider defaults to be just a different type ofÂ prepayment. Typically, the higher coupon loans have default issues, and once the loans become 90-days delinquent, the lender generally purchases them out of the pool and repays them at par. This lowers returns for the portfolio going forward.
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