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Initial jobless claims are back at boom-time levels

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Initial jobless claims

Initial jobless claims are one of the few labor market indicators released every week. Unemployment is a profound economic growth driver. 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 aggressively add staff. Initial jobless claims have held steady in the low 300,000s.

Historically, real estate prices track very close to incomes. Until the real estate bubble burst, the ratio of median home price to median income remained in a relatively tight range between 3.2x and 3.6x. So, if unemployment is rising, there’s little upward pressure on wages. This tends to be negative for home prices. Also, people who are unemployed can’t qualify for a mortgage, so the pool of buyers shrinks.

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Initial jobless claims are at top-of-market levels

Last week, 278,000 people filed first-time unemployment claims—another print below 300,000. We haven’t seen these levels since April 2000. In fact, as a percentage of the population, initial jobless claims are at their lowest since the late 1960s.

Initial jobless claim levels below 300,000 usually correlate with economic booms—like 1999–2000 and early 2006. The reason that our economy doesn’t feel as good as it did in the late 1990s or early 2006 is probably due to the low labor force participation rate. We still have some slack in the labor market that isn’t reflected in the numbers.

Impact on mortgage REITs

Mortgage REITs—like Annaly Capital (NLY), American Capital Agency (AGNC), MFA Financial (MFA), Capstead (CMO), and Hatteras (HTS)—are extremely sensitive to interest rates, particularly short-term rates. Increases in short-term rates bump up their cost of funding their balance sheet. Strong employment data could push the Fed to start hiking rates. This would be negative for the mortgage REIT sector.

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