The Job Openings and Labor Turnover (JOLT) report from the Bureau of Labor Statistics is a good forward indicator of the labor market.
The Bureau of Labor Statistics (BLS) complies the data from a random sample of private non-farm businesses. The Job Openings is one piece of the report – the other is hires vs separations. To be considered as a job opening, the business must have a specific position in mind, be ready to employ someone in the next 30 days, and must be actively soliciting candidates for that position.
Job growth is the biggest driver of the economy right now, and the unemployment rate is driving the Fed’s quantitative easing program. The activity and the decisions of the Fed are probably the biggest driver of returns in the financial sector right now.
3.9 million job openings in Feb, the largest since March of 2008
3.9 million job openings is above the 3.6 million average since BLS began compiling the index in 2000. In early 2000, the index peaked at close to 5.2 million, and it bottomed at 2.2 million in mid 2009. The sectors with the most openings were Professional and Business Services, Education and Health Care, and Trade Transportation and Utilities. Of those three, only Trade Transportation and Utilities showed a drop. The largest increase was in construction, which is still recovering from a depressed level since the housing bust. In spite of the fears over the sequestration, government hiring increased 6% in February.
Implications for the mortgage REITs
Given that unemployment is stubbornly high, and the labor force participation rate is the lowest since the Carter Administration, it seems strange to see higher than average job openings. One of the biggest features of the job market has been a mismatch between skills available and skills required. Part of this is due to education – factory workers need to be more tech savvy than ever before. Another consideration is lack of mobility – workers cannot relocate to where the jobs are. Why? Negative equity. This traps workers in areas where there is a surplus of workers and depressed real estate values.
Problems like this are likely policy targets. First, it means that the Fed will continue to keep interest rates as low as possible to increase home affordability. Second, it means that the government will push loan servicers to modify mortgages by lowering principal. Acting FHFA Chairman Ed DeMarco has resisted allowing principal mods to Fannie / Fred / Ginnie loans, but his days may be numbered. Democrats in Congress are pushing for someone more amenable to principal mods to take his place.
The net effect on REITs such as AGNC, NLY or HTS will be low interest rates and higher prepayments. Low interest rates mean that mortgage REITs will have to use more leverage than usual to generate acceptable returns. As long as there is stability in the financial markets, their borrowing rates will remain low. They will benefit from having steady or rising prices for the assets on their balance sheet. The downside will be prepayments and delinquencies. For agency REITs, prepayment risk is their biggest worry. Prepayment risk occurs when borrowers refinance their mortgage, which removes high yielding assets from the REITs portfolio and replaces them with lower-yielding assets. This lowers net returns.
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