INITIAL CLAIMS JUMP AND SHOULD REMAIN HIGH FOR SEVERAL WEEKS
Initial Claims Rise 35k
The headline initial claims number rose 35k WoW to 445k (36k after a 1k upward revision to last week’s data). Rolling claims rose 5.5k to 417k. On a non-seasonally-adjusted basis, reported claims rose 192k WoW. As the third chart below shows, claims are usually elevated in this week of the year. Based on the charts below it seems probable to expect that claims will continue to rise for the next several weeks.
As a reminder, based on our analysis of past cycles, the unemployment rate won't improve until we see claims move into the 375-400k range. That said, it is worth highlighting an important caveat. This recession has been different in that it has pushed the labor force participation rate down by ~200 bps, which has had a correspondingly positive improvement on the unemployment rate. In other words, the unemployment rate isn't really 9.8%, it's 11.8%. So when we say that claims of 375-400k will start to bring down the unemployment rate, we are actually referring to the 11.8% actual rate as opposed to the 9.8% reported rate.
In the table below, we chart US equity correlations with Initial Claims, the Dollar Index, and US 10Y Treasury yields on a weekly basis going back 3 months, 1 year, and 3 years.
MORTGAGE DEMAND TUMBLES 24% IN 2010 AND 3.7% SO FAR IN 2011
Taking a Look at the Forest
Now that 2010 is done, it's worth taking a step back and considering how mortgage demand fared throughout the whole year. On a full-year basis, the 2010 mortgage purchase applications index averaged 200, which was down 24% year-over-year when compared with the average index level of 264 for 2009. For reference, both years included a stimulative tax credit - 2009's was late in the year while 2010's was early in the year. 2010's 24% decline was a continuation of a trend that's been in place since the peak in 2005. Consider the following year-over-year changes: 2006: -14%, 2007: +4%, 2008: -19%, 2009: -23%, 2010: -24%. We think that speaks quite clearly to the longer-term trend in place in housing demand. This is in spite of affordability improving in each of these years. We would expect 2011 to be another down year for housing demand, driven by still tighter underwriting standards, a lack of incremental downside in mortgage rates and a deflationary mindset driven by further declines in home prices keeping buyers on the sidelines.
Taking a Look at the Trees
MBA Purchase Applications fell 3.7% week over week. Refinance Applications rose 4.9% as mortgage rates fell. On a year-over-year basis, purchase applications were down 10%. The charts below show the recent trends in this series.
Joshua Steiner, CFA