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Initial jobless claims still understated due to computer problems

Brent Nyitray, CFA, MBA

Initial jobless claims fell to an annualized rate of 309,000 for the week ended September 13

Initial jobless claims are one of the few labor market indicators released every week. Unemployment is a profound driver of economic growth, and persistent unemployment has been the Achilles’ 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 Sandy–influenced spike in late October, initial jobless claims have been holding steady in the 340,000-to-380,000 range.

(Read more: Annaly Capital Management portfolio yield continues to fall)

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, there’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.

(Read more: Consumer Financial Protection Bureau rose cost of loan servicing)

Initial jobless claims are back to pre-bust normalcy

Last week’s sub-300,000 print on initial jobless claims was the lowest since May 2007, but this was due to a technical issue. Two states (California and Nevada) were having computer issues and under-reported claims. It sounds like they’re still being affected by this issue and will take a few weeks to get caught up.

Before the housing bust, initial jobless claims averaged around 356,000 from 1990 to 2007. This doesn’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  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 they’re having to pay up for talent. This bodes well for the labor market going forward.

The bond market has been selling off globally since May 1. Ben Bernanke added fuel to the fire when he disclosed that the default path for the Fed is to start pulling back purchases this year with an eye towards fully ending quantitative easing by mid-2014. Since then, the mortgage REIT sector has been under severe pressure. The Fed gave the markets a reprieve at the September FOMC (Federal Open Market Committee) meeting, but the writing’s on the wall—quantitative easing’s days are numbered.

(Read more: Fannie Mae TBAs flat as rates stabilize, good for mortgage REITs)

Impact on mortgage REITs

Non-agency mortgage REITs, such as Chimera (CIM), PennyMac (PMT), or Two Harbors (TWO), which invest in non-government–guaranteed mortgage-backed securities, are sensitive to the economy, as delinquencies and defaults can influence returns. The unemployment rate is by far the biggest driver of defaults. Agency REITs—such as Annaly (NLY) or American General (AGNC)—that invest in Ginnie Mae (government-guaranteed) or conforming (Fannie Mae, government-sponsored) mortgage-backed securities consider defaults to be just a different type of 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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