Tucson Mortgages Home Loan News 1-6-2020

By Todd Abelson NMLS #180858 on .

Week of December 30th, 2019 in Review

Last week was not only the last week of the year, but also the last week of the decade.  The Stock market posted impressive gains in 2019 with the major indices posting the following year over year gains:

  • Nasdaq: 35.2%
  • S&P 500: 28.9%
  • Dow: 22.3%

With last week being a holiday shortened week, things were quiet, but Mortgage Bonds were able to edge higher and break above some important technical levels.

The US and Iran conflict has escalated after a series of events over the last two weeks.  An American contractor was killed by an Iranian-backed rocket attack, which eventually led to the US drone strike and killing Iranian General Qasem Soleimani.  As a result, Stocks did sell off at the end of the week and will likely continue to do so this week as the Stock market does not like uncertainty.  Typically, when this occurs there is a “flight to quality” trade, where money flows into the Bond Market, and Mortgage Bonds are benefiting.

The question on many investor’s and individual’s minds will be “Can the Stock market continue to move higher in 2020?” Stocks are at pricey levels and a lot of the run up was due to euphoria over the US and China Phase 1 trade deal.  As mentioned in last week’s issue, the Fear/Greed index is also at extreme levels of greed, which is a reliable contrarian indicator.  If there is a pullback in Stocks, Bonds will likely be the beneficiary.  Another question is “When will there be a recession?”  The US is in the longest expansion on record and it’s not a matter of if, but when the next recession will come.  Some are calling for a recession in 2020, while others think it will happen in 2021 or beyond.  One thing we know for sure is that when the recession hits, Stocks will drop significantly and interest rates will fall.

One of the key early warning indicators we are watching is Initial Jobless Claims.

Claims Remain Steady but Could Play Important Role in 2020

Initial Jobless Claims, which measures individuals filing for unemployment benefits for the first time, showed that there were 222,000 Claims.  The level of 222,000 was in line with expectations and 2,000 lower than the previous week, which was revised slightly higher from 222,000 to 224,000.  Claims have been hanging around this level and have been steady…but this is an early indicator that we want to watch for a recession.  If we start to see this report spike higher, it could be a warning sign.  Why?  When things do slow down, the first thing a business will do is stop hiring.  Next, the business will let workers go.

Once businesses start to fire employees, those individuals will file for unemployment benefits and it will show up in Initial Jobless Claims.  And eventually, the unemployment rate will move higher.  With 100% accuracy, the unemployment rate has been a predictor of recessions.  Interestingly, it’s not when the unemployment rate is at its highest point, but when it’s at its lowest point and then turns higher.  The unemployment rate is currently at 3.5%, so if it moves slightly higher to 3.6% or 3.7%, it’s not something to worry about.  But if it moves above 4%, it could be a sign of a recession to come in the next 6 months or so.  Keep a close eye on a consistent spike in Initial Jobless Claims, as that will be the first sign.

Appreciation Remains Strong

The Case-Shiller Home Price Index, which is considered the “gold standard” for appreciation, showed that home prices across all nine U.S. Census divisions were up 3.3% October, which was a slight increase from 3.2% in September.  The 20-city Index increased to 2.2% on a year over year basis from 2.1%.  Phoenix, Tampa, and Charlotte led the metro areas that are covered.  To see what 3.3% appreciation means to you, let’s examine an example:

Imagine you purchased a $300,000 home last January.  If your home appreciated 3.3% over the course of the year, your home would be worth $9,900 more…which is very meaningful for wealth creation.  And homes that are lower priced and trading near or below the median price in a given market are appreciating at a higher level closer to 5%.

The FHFA (Federal Housing Finance Agency) supports this – Their House Price Index, which measures home price appreciation on single-family homes with conforming loan amounts, represents lower priced homes.  While there could be a million-dollar home with a conforming loan, for the most part, the index represents homes under $500,000.    The FHFA showed that homes rose 5.0% year over year and this number has been accelerating.  It was 4.6% just two months ago.

With inventory levels at record lows and demand remaining very strong, we expect appreciation to continue to be solid in 2020 and even accelerate.

What to Look for This Week

This week is Jobs week, with the ADP and BLS (Bureau of Labor Statistics) Jobs Report released on Wednesday and Friday respectively.  The market is expecting between 150,000 and 170,000 job creations in each report.  The ADP can give us some clues on Friday’s BLS Jobs report, but often times they do not track closely month to month.  Just look at last month – The ADP report showed that there were only 67,000 job creations, while the BLS report showed that there was 266,000…quite the disconnect.

These two reports do correlate closely over time, however.  And if they were to come closer to one another, it could happen one of two ways.  There could be significant revisions or there could be a “catch up” or “give back” the following month.  After the BLS Report surprised sharply to the upside, it would not be surprising if there was a negative revision or weaker figure in Friday’s report.  A strong jobs report would coincide with higher Stocks and lower Bonds, while a weak jobs report would send Stocks lower and Bonds higher.

There are a few other factors – The unemployment rate is always an important indicator to watch.  The last reading was at 3.5%, but it is expected to rise to 3.6%.  Another important and potentially market moving component for the Bond market is average hourly and weekly earnings, which can show if there is wage pressured inflation.

Technical Analysis Breakdown

Mortgage Bonds have made a nice move higher and are now in the middle of a range between support at 101.53 and overhead resistance at the 101.904 Fibonacci level.  While the move higher in Bonds is a good thing, they are now in a wide range with roughly 20bp of room to improve and move higher until reaching resistance and 20bp of room to worsen and move lower until reaching support.  If the Iran conflict continues to be at the forefront of investors minds, Stocks will likely continue to selloff and Bonds may benefit.