Friday Wrap: Jobs Reports Mixed, and Strong Q3 Housing

Politics Weigh on Wall Street Along with Mixed Jobs Report

There is still optimism on Wall Street that we will see a new federal stimulus package before the November 3 election, but that optimism seemed to wane as the week continued. Wednesday’s meeting between Treasury Secretary Steve Mnuchin and Speaker of the House Nancy Pelosi (D) did not result in a coronavirus stimulus compromise. The House delayed its initial vote on a $2.2 trillion plan in hopes of getting more bipartisan support. The House eventually passed the plan Thursday evening. Pelosi and Mnuchin say they continue to discuss compromises, but they are finding difficulty coming to an agreement on some key issues. It might be all for naught, however, as Senate Majority Leader Mitch McConnell (R) has already voiced his opposition.

Without another stimulus package, federal funding for airlines has run out. Starting Thursday of this week, American and United implemented furloughs for 32,000 employees. Both airlines said they would stop the furloughs if they were able to get more funding from the government. Airlines were prevented from making job cuts until Oct. 1 due to a $25 million provision in the federal funding plan.

The optimism heading into Wednesday’s stimulus bill talks helped lift Wall Street with the Dow rebounding more than 300 points. However, September still ended as the first losing month since March due in large part to the correction in tech stocks. Markets closed Thursday’s session slightly higher as many gains on the day were pared by the uncertainty regarding a new stimulus bill. The Dow ended the day up just around 35 points after being up as much as  250 points on the day.

Friday’s futures were down by more than 350 points as the markets digest the news that President Trump, and First Lady Melania Trump, both tested positive for COVID-19. The two will now quarantine in the White House for two weeks. The diagnosis added even more uncertainty about the upcoming election. Tech shares also pulled markets down with Apple and Tesla falling 3% and 5%, respectively.

Investors also have concerns about the upcoming election after the first in a series of presidential debates. Tuesday night’s debate was a raucous event which leads investors to believe the electoral process could be a long, drawn-out affair that will likely not end when the ballots are counted on November 3. There is lingering concern that if there is controversy over the election that will it hit the markets hard in a down trade.

 

Mixed Messages in Jobs Reports

The unemployment rate in America is down to 7.9%, but we only added 661,000 jobs in September, according to the Labor Department’s last jobs report before the election. Economists had expected at least 800,000 non-farm payroll jobs to be added. The details in the report show where there is some progress being made with employment. For example, the number of people reporting being in a temporary layoff declined by 1.5 million. Also, the number of people reporting holding a part-time job for economic reasons fell by 1.3 million.

The private sector jobs report from ADP was better than many economists expected with 749,000 jobs added in September. Dow Jones economists had predicted around 600,000. The biggest jumps in the ADP report were seen in manufacturing as well as trade, transportation and utilities. Leisure and hospitality saw a gain of 92,000 jobs. As more states push further toward reopening (Florida and North Carolina are both in phase 3 of their reopenings) it’s likely we will see this number increase in the coming months. It is important to note that it was companies with more than 500 employees which saw the biggest gains. Small companies, those with fewer than 50 workers, did add jobs back but not nearly at the pace of the larger companies.

Meanwhile, weekly unemployment claims also stayed below 1 million, coming in at a better-than-expected 837,000. The Labor Department’s continuing claims data showed another positive with claims of two weeks or more falling by nearly 1 million to sit at 11.77 million.

 

Housing Steamrolling Through Q3

Housing is moving along at a record pace according to the latest data from the National Association of Realtors. August’s pending home sales increased by 8.8% compared to July. That is a record pace since the NAR began keeping the data in 2001. Annually, pending home sales were up 24.2%. Remember, August of 2019 is when interest rates really started ticking lower, dropping below 3.75% and eventually hitting 3.58% according to Freddie Mac’s records. This week’s Freddie Mac average on a 30-year fixed-rate mortgage is 2.88%. These rates are not only giving consumers more confidence in purchasing and refinancing, but they’re also giving people more spending power. You can see in the chart below from Freddie Mac the downward trajectory of rates from March of this year to today. You can see where the 30-year has basically flatlined over the last couple of months.

“Tremendously low mortgage rates, below 3%, have again helped pending home sales climb in August,” said Lawrence Yun, the NAR’s chief economist. “Additionally, the Fed intends to hold short-term fed funds rates near 0% for the foreseeable future, which should, in the absence of inflationary pressure, keep mortgage rates low, and that will undoubtedly aid homebuyers continuing to enter the marketplace.”

The rates are a welcome reprieve for buyers who are facing intense competition for home purchases. The increased demand has been partially affected by the COVID-19 pandemic as many urbanites seek bigger spaces in the suburbs. That spike in demand, coupled with limited inventory, has pushed prices up by 4.8% (YOY) nationally, according to the S&P CoreLogic Case-Shiller National Home Price Index. Keep in mind when you are looking at this index that it is a three month running average. So August’s numbers combine May, June and July. What we are seeing in August means the next reading will likely be even higher.

Higher prices and lack of inventory may be the main reasons why we are seeing a decrease in mortgage applications. The Mortgage Bankers Association’s weekly survey showed applications down 4.8% from the week prior, but still up 22% annually. Refinances specifically slowed by 7% week-over-week but are still an astounding 52% higher than a year ago. Refinances have been affected by the adverse market fee imposed by Fannie Mae and Freddie Mac. The fee has been pushed off officially until December, but many lenders have already started to incorporate the fee into pricing as most loans that lock now will be sold in December or into Q1 2021.

There is a lingering problem in housing related to the coronavirus: Forbearance. The latest data from Black Knight shows that the number of mortgages in pandemic-related bailout plans rose by 21,000 in the last week. That’s the first increase in six weeks. The type of loan is important to consider as Fannie and Freddie loans in forbearance went down by 9,000. Most of the increases were seen in bank-held and private-labeled security loans; those went up by 28,000. Meanwhile FHA/VA-backed loans saw 2,000 more loans go into a forbearance plan. As of this week, there are about 3.6 million mortgages in a forbearance plan. That represents about 6.8% of all mortgages and around $751 billion in unpaid principal.

 

Contributed by Greg Richardson, MAXEX Managing Director

Greg Richardson

Greg Richardson is Managing Director at MAXEX, LLC, based in Atlanta, GA. He has 30 years of experience in capital markets, including trading, banking asset and portfolio management, mortgage banking secondary marketing and accounting. MAXEX is the only platform in the mortgage industry to offer a centralized clearinghouse that enables buyers and sellers to trade anonymously with multiple counterparties using a single standardized