Wall Street cruising despite jobs report speed bump, housing stays hot
While Wall Street continues to boom, the rest of the American economy is struggling to keep up. The November jobs report released Friday morning showed that fewer than 250,000 nonfarm payroll jobs were added in November, against estimates of 440,000. The unemployment rate overall did tick down to 6.7%, as did the labor force participation rate. While the gain of 245,000 jobs and a drop in unemployment might normally be touted as a strong report, in the era of COVID and millions of Americans unemployed, this is fairly disappointing.
Private payrolls also slowed considerably in November. The ADP's monthly report showed a gain of just over 300,000 workers–well below the estimate of 475,000. October's numbers were upwardly revised to 404,000. Not surprisingly, November's numbers showed the largest increase came from the hospitality sector with small businesses adding 110,000 jobs. Job growth overall remains positive, yet also slow.
On the other end of the spectrum, unemployment claims hit a pandemic-era low but still came in well above 700,000. The Labor Department's report shows 712,000 Americans filed initial unemployment claims over the last week with continuing claims dropping sharply by 569,000 to 5.52 million total.
It's important to note that, recently, the Government Accountability Office reported that weekly jobless claims have not been accurate during the pandemic. Uncounted backlogs, fraud and other discrepancies were outlined by the GAO as the main issues with the reporting by the Labor Department.
Despite the lackluster jobs data, Dow futures were still up by 120 points in early Friday trading, with the S&P 500 and Nasdaq up 0.4% and 0.3%, respectively.
In the background, Congress has renewed talks of a federal stimulus package. For the first time since the election, House Speaker Nancy Pelosi and Senate Majority Leader Mitch McConnell discussed terms for another COVID stimulus deal with new motivation: potential for a government shutdown.
The current government funding plan expires on Dec. 11, increasing impetus to get a stimulus deal done as well. Pelosi, along with Senate Minority leader Chuck Schumer, have apparently cut their demands, endorsing a smaller $908 billion package.
The lack of progress on the second stimulus package has stymied Treasury yields. The benchmark 10-year Treasury note continues to flirt with the 1.00% mark but can't quite get over the hump. Thursday's 10-year note yield dipped back down to 0.908%. In early Friday morning trading, the 10-year note was trading at 0.951%.
BEIGE BOOK OVERVIEW
The markets were little affected by the Federal Reserve's last Beige Book release for the year. Overall, the various Federal Reserve Districts "characterized economic expansion as modest or moderate" since the last publication. When it comes to lending, banks were more concerned with commercial lending as related to leisure and hospitality with an increase in delinquencies in 2021 anticipated. While the general sentiment remains positive overall, optimism is waning as reported cases of COVID-19 tick upwards, expiration dates are approaching for unemployment benefits and the moratoriums on evictions and foreclosures come to a close.
YELLEN AND HOUSING
The week of Thanksgiving, President-elect Joe Biden nominated former Federal Reserve Chair Janet Yellen to be his Secretary of the Treasury. Many economists and politicians see Yellen as a mostly moderate voice and expect her to continue to take that same stance moving forward. They also feel that this nomination indicates support from the Biden administration to use more federal funds to stimulate the economy while also encouraging the Fed to keep interest rates low.
The issue of conservatorship will likely be an early issue for Yellen. As it currently stands, Treasury Secretary Steve Mnuchin and Federal Housing Finance Agency director Mark Calabria are working to free government sponsored enterprises Fannie Mae and Freddie Mac from conservatorship. To do that, the GSEs have been allowed to retain more capital to build up the necessary funds.
The general assumption is that, while it may not happen as fast as some on the Republican side would like, ending conservatorship of Fannie and Freddie will still be accomplished in coordination with Yellen, albeit at a slower pace. Six years ago, Yellen made her stance on the GSEs very clear, saying, “I think we still have a system that has systemic risk, that government funding remains critical to the mortgage sector, and I think to get the housing market back on its feet. It’s important for Congress to put in place a new system and to explicitly decide what the role of the government should be in helping the housing sector.”
Yellen continued, “There are a variety of ways to do it, but I think the government should make its intended role more explicit and make sure that whatever entities are set up to deal with housing finance don’t create systemic risks to the financial system.”
HOUSING STILL SOARING, BUT IS THERE A CEILING?
Depending on which data set you look at, you could get a very different picture of where the housing market is headed. The Mortgage Bankers Association's latest report shows a 9% jump in weekly mortgage purchase activity with a whopping 28% annual increase. Refinances continue to dominate the landscape with an annual increase of 102% according to the MBA.
The report also shows the average purchase loan amount hit $375,000–that's the highest on record since the MBA was created in 1990. Joel Kan, the MBA’s associate vice president of economic and industry forecasting, said "Purchase activity continued to show impressive year-over-year gains, with both the conventional and government segments of the market posting another week of growth." Kan went on to say, "Housing demand remains strong, and despite extremely tight inventory and rising prices, home sales are running at their strongest pace in over a decade.”
Analysts at Freddie Mac take a little bit of a different point of view on what the purchase market means right now. This week, Freddie Mac's 30-year fixed-rate mortgage average dipped to yet another historic low, dropping to 2.71%.
Sam Khater, Freddie Mac's chief economist, believes that, "Despite persistently low mortgage rates, home sales have hit a wall. While homebuyer appetite remains robust, the scarce inventory has effectively put a limit on how much higher sales can increase. Unfortunately, the record-low supply combined with strong demand means home prices are rapidly escalating and eroding the benefits of the low mortgage rate environment."
In response to the sharp increase in home prices, Fannie and Freddie increased the conforming loan limit for 2021, from $510,400 to $548,250. The Federal Housing Administration followed suit this week, increasing its 2021 loan limit to $356,362. That's an increase of nearly $25,000. But, that loan limit is actually the floor for more high-cost cities. The FHA is required to set single-family forward loan limits at 115% of median house prices. For high-cost areas, the loan limits have a ceiling of up to 150% of median home prices. That would mean some areas will have a 2021 FHA loan limit of $822,375.