Initial jobless claims fell slightly, good for non-agency REITs



Initial jobless claims decreased to 339,000 for the week ended November 8

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 Claims

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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. It appears that the California distortion has finally cleared.

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 healthcare sector is laying people off to reduce costs. Neither the mortgage slowdown nor the healthcare slowdown (which is driven by Obamacare) is going away any time soon.

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.

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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