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Why initial jobless claims increased to 368,000 on December 6

Brent Nyitray, CFA, MBA

Initial jobless claims increased to 368,000 for the week ended December 6

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.

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.

The print could be an unwinding of an artificially low number the week before

This appears to be a rebound driven by the holiday-shortened week or Thanksgiving. That week was unusually low (below 300,000), which means some of the filings could have been delayed and we “caught up” during last week.

The data show that there doesn’t appear to have been any lasting repercussions from the government shutdown. Scare stories of massive ripple-throughs never materialized, just as the sequester ended up having little effect on economic growth.

That said, the financial industry is laying people off as the mortgage business dries up. Also, as we saw from the Challenger and Gray Job Cut announcement, the defense and retail sectors are laying people off to reduce costs.

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. Overall, the economic data seem to indicate the economy is on the mend, so perhaps we can look forward to seeing normalcy in the initial jobless claims data.

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 Capital Agency (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 purchases them out of the pool and repays them at par. This lowers returns for the portfolio going forward.

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