Weekly Realist Real Estate Roundup (Part 5 of 7)
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The ten-year bond is the basis for all mortgageÂ pricing
Long-term interest rates are priced off the benchmark long-term bond, which is the ten-year Treasury. These days, the ten-year bond reacts to economic data through the Federal Reserveâ€™s asset purchase program, also known as quantitative easing (QE). As a general rule, economic data that shows weakness is bond bullish (positive). However, data that shows strength isnâ€™t necessarily bond bearish (negative).
The week in review
Last week was all about the jobs report, which showed unemployment dropping to 7.3% and also the labor force participation rate dropping to 63.2% â€“ Â the lowest since 1978. The week started off with the ISM Manufacturing Report, which was stronger than expected at 55.7. Â Construction spending rose .6% as well, which was good news for the homebuilders. Initial Jobless Claims came in at 323k, the second-lowest reading since the Great Recession began, while productivity came in at a good reading of 2.3%. Finally, on Friday, we saw that non-farm payrolls rose 169k in the month of August, which was disappointing. The 10 year bond yield had a 3 handle ahead of the report, but rallied on the disappointing print.
Implications for mortgage REITs
Mortgage REITs, like Annaly (NLY) and American Capital (AGNC), are driven by interest rates.Â The mortgage REITs have been crushedÂ as the ten-year bond has sold off, but theyâ€™ve been trying to form a bottom here. For REITs, itâ€™s all about the Fedâ€™s exit of QE. The consensus seems to be that Fridayâ€™s jobs report wasnâ€™t good enough or bad enough to change the Fedâ€™s perception of the economy and its timing for ending QE.
Implications for homebuilders
Homebuilders, like Lennar (LEN), KB Home (KBH), and Standard Pacific (SPF), are more sensitive to general economic strength. The strong ISM report showed the manufacturing sector is doing well, which was good to see. But the disappointing jobs report demonstrated that the nascent economic strength still has yet to filter through to jobs.
Continue toÂ Part 6: Preview of the upcoming week
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