uploads///Nonfarm Payrolls

Why strong payroll growth is shaping REIT and homebuilder stocks

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Dec. 4 2020, Updated 10:53 a.m. ET

Lots of economic data last week

We had quite a few important economic releases last week, starting with construction spending, which came in lower than expected. But the prior month was revised upward in a big way. Still, the construction spending number was surprising, given the blowout new home sales number the week before.

We also got the ISM data last week. It was lower than expected but still strong. We’re starting to see more job growth in the manufacturing and services sectors. And we’re starting to see the beginnings of tightening in the labor market. Once we start getting wage inflation, full-blown inflation won’t be far behind.

The jobs report was strong on its surface. Payrolls increased 288,000 and the unemployment rate fell to 6.1%. But the job growth was in the part-time category. The labor force participation rate remained mired at its lows. Average hourly earnings increased 2%.

Commercial REITs will be encouraged by economic strength

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Commercial REITs in the retail space, like Simon Property (SPG) and General Growth Properties (GGP), will certainly be concerned about the weak economic optimism numbers. Office REITs like Vornado Realty Trust (VNO) will be cheered by the job growth data, as they’re indifferent between full-time jobs and part-time jobs.

Implications for mortgage REITs

Mortgage REITs, like Annaly (NLY) and American Capital (AGNC), are driven by interest rates, which have been in a tight trading range. Investors are becoming more comfortable with the idea that the Fed isn’t looking to raise rates too soon. People seem to have digested the possibility—although it’s probably unlikely—that the Fed will start hiking rates at the June 2015 FOMC meeting.

Implications for homebuilders

Homebuilders, like PulteGroup (PHM) and D.R. Horton (DHI), focused on the construction spending data, the ISM data, and the jobs report. The builders will certainly be disappointed that the growth in employment has been at the part-time jobs level. Part-timers aren’t going to be buying new construction.

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