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Initial jobless claims rise: Furloughed government workers excluded

Initial jobless claims increase to an annualized rate of 308,000 for the week ended September 27

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.

Initial Jobless ClaimsEnlarge Graph

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.

Initial jobless claims are back to pre-bust normalcy

We recently had a sub-300,000 print on initial jobless claims, which was the lowest since May 2007, but this was due to a technical issue—two states were having computer issues and under-reported claims. That issue seems to be over.

The Federal Government has said it will separate furloughed government employees from the initial jobless claims numbers to keep an apples-to-apples comparison. Furloughed workers are eligible for unemployment, but they can find themselves back at the job at any time.

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.

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.