But don’t expect profitability to be significant compared to long-term historical averages as home prices still remain high.

Mortgage rates have softened in the past couple of months, leading to a slight decline in the median mortgage payment and a pickup in mortgage demand.

But even if mortgage rates dropped to 4%, the median monthly payment would still be 44% above pre-pandemic levels, noted Kevin Barker, managing director of Piper Sandler. 

“We need to see a more meaningful decline in home prices or affordability will continue to be a headwind to home sales even if we see further softening in rates,” said Barker. 

Median home prices trended lower for the fifth consecutive month on an absolute basis in November, down 5% from near-term highs in June. 

However, on a year-over-year basis in November, median home prices increased 5% in the Northeast, the West, the Midwest, respectively, and 3% in the South.

A variable that could lead to a softening in home prices is unemployment.

“We continue to expect home prices to come under pressure despite the near-term resilience and supply shortage. Home prices and rates remain too high for new home buyers, particularly with income growth slowing. If we were to see the labor market soften, we expect a more pronounced decline in home prices.” said Barker. 

Mortgage prepayment speeds continuing its lower trend will prop up servicing fee revenue streams.

Prepay speeds on 30-year fixed rate pools of agency mortgages in the month of November dropped by 40-55 basis points (bps) month over month to 4.3% for Fannie Mae and Freddie Mac pools. Ginnie Mae pools remained relatively steady at 5.7%. The low prepay speeds indicate mortgage servicing rights (MSR) amortization expense should continue to decline. 

“We expect these tailwinds to continue despite the near-term drop in mortgage rates given very few borrowers have a mortgage rate above the current market rate. We would need to see a more persistent decline in 30-year fixed rates to up to 6% for a more meaningful pickup in prepay speeds,” said Piper Sandler. 

In my 2023 forecast, I wrote that if the economy stays firm, the 10-year yield range should be between 3.21% and 4.25%, equating to mortgage rates between 5.75% and 7.25%. As long as jobless claims trend below 323,000 on the four-week moving average, the labor market is holding steady, which means the economy remains healthy. As you can see in the chart below, the 10-year yield channel has stayed within my 2023 forecast range.

For the labor market to break, the four-week moving average on jobless claims needs to get above 323,000, but that number is only at 248,000. Jobless claims have been rising from the recent lows, but haven’t broken yet.

From the St. Louis Fed: Initial claims for unemployment insurance benefits increased by 12,000 in the week ended July 1, to 248,000. The four-week moving average fell, to 253,250.

Mortgage rates have stayed in line with my forecast this year, but the spreads have gotten worse. What factors could send mortgage rates toward 8%, which wasn’t part of my forecast? The first factor is the labor market, which is more important in 2023 than the inflation growth rate.

The labor market

Early in the COVID-19 recovery, I had three key talking points:

• We should get all the jobs back lost to COVID-19 by September 2022.
• Job openings should get to 10 million in this recovery.
• If COVID-19 didn’t happen, taking trend growth from February 2020, we should be at 157 million to 159 million total workers employed (nonfarm payroll).

Here’s where those landed:

• We recovered all the jobs lost to COVID-19 by September 2022.
• Job openings are still high historically. While we are far below the peak number of job openings, this level is simply too high for the Fed to feel comfortable — they don’t fear a job loss recession when job openings are this high.
• However, with jobless claims and job openings data, we can see that the labor market isn’t as tight as it used to be.

The third factor is also key to understanding the labor dynamics: we are almost back to where we should have been all along with the total employment level of jobs in the U.S. Currently, we are at 156,214,000, so we’re getting closer to where job growth should be cooling down to our population growth realities.

The job market should slow down as we get closer to that 157 million to 159 million level. Next is wage growth, which isn’t spiraling out of control as some people feared it would. The growth rate is still too hot for the Fed, so if they seem more hawkish, it’s because wage growth at 4.4% is too much for Americans. The Fed has to ensure you don’t make more money because of some desperate fear of 1970s-style inflation, which is unfounded.

Friday’s wage growth was hotter than anticipated but not spiraling higher out of control. Wage growth has been cooling off since January of 2022, all while the labor market was tight.

To get to 8% mortgage rates, my 10-year yield peak call for 2023 would have to be wrong, the economy would have to be stronger than any of us believe it to be, and the bond market would need to believe that too. So far, that has yet to happen. If you had to have first-world problems, this is the one you would want to have. 

Let’s look at the job report.

From BLS: Total nonfarm payroll employment increased by 209,000 in June, and the unemployment rate changed little at 3.6 percent, the U.S. Bureau of Labor Statistics reported today. Employment continued to trend up in government, health care, social assistance, and construction.

While the headline number was a miss for some people, it wasn’t a bad headline print, but the revisions were negative 110K, combined. As I mentioned above, we are getting closer to being done with the make-up demand in labor, which should mean the growth rate of jobs should be lower.

Below is the breakdown of where the jobs were created and lost. We did have an extensive report on the government jobs, which typically doesn’t have staying power, so the private labor data was weaker than the headline print.

Below is a breakdown of the education attainment and labor force above the age of 25. As usual, those who never finished high school tend to have the highest unemployment rate.
Less than a high school diploma: 6.0% (2 months ago, 5.4%)

• High school graduate and no college: 3.9%
• Some college or associate degree: 3.1%
• Bachelor’s degree or higher: 2.0%

Wage growth came in a bit hotter than expected, but wage growth is not spiraling out of control, not so much that we need to force a job loss recession. Also, we should not want to hope for the meager wage growth we saw in previous expansions either.

This is my case for why I don’t believe we should see 8% mortgage rates. I could be wrong for a short period — we could have a bond market sell-off due to the U.S. dollar getting much stronger for many reasons — but that hasn’t happened yet.

So far this year, the 10-year yield channel has held its course, and the big surprise of 2023 has been the spreads getting worse. I still believe that is the mortgage rate story for the year, as the 10-year yield hasn’t surprised me. But with that said, if the economy accelerates higher with faster growth and wage growth picks up with the labor data getting stronger, that is a viable pathway for 8% rates as the spreads might even worsen.

Let’s cross that bridge if that happens, but until then, we will continue to track the weekly housing data here.

As someone who wrote that we should get job openings toward 10 million in this expansion, I am always mindful of my other labor talking point. If COVID-19 didn’t happen, the total employment numbers in the U.S. today should be between 158 million and 159 million, or in a weaker labor market growth scenario, between 157 million and 158 million.

Today, we stand at 156,105,000, so I think we are still in make-up mode until we reach a range acceptable to a fast economic recovery.

That’s why the jobs data has beaten expectations 14 months in a row. What the U.S. has that other countries don’t is a massive young workforce. While population growth is slowing here, we have the demographic muscle that other countries don’t have — if we didn’t have that, our economic discussion would be different.

Now let’s look at the labor market on all fronts from the data we got this week to get a comprehensive view of the labor market today. On Friday the BLS reported job growth came in at 339,000, with positive revisions, while the unemployment rate went higher, as there was a drop in self-employed workers.

From BLS: Total nonfarm payroll employment increased by 339,000 in May, and the unemployment rate rose by 0.3 percentage point to 3.7 percent, the U.S. Bureau of Labor Statistics reported today. Job gains occurred in professional and business services, government, health care, construction, transportation and warehousing, and social assistance.

Hours worked have fallen in the last few months, and wage growth is slowing. The fear of 1970s-style inflation was that wages could grow out of control in a tight labor market. In theory, 2022 and 2023 are tight labor markets and wage growth is slowing down. This trend should continue for the next 12 months as well.

Here is a breakdown of that data for those aged 25 and older:

• Less than a high school diploma: 5.7% (2 months ago, 4.8%)
• High school graduate and no college: 3.9%
• Some college or associate degree: 3.2%
• Bachelor’s degree or higher: 2.1%.

The noticeable data line here is that the unemployment rate for those without a high school education is up almost 1% from two months ago.

Here is the breakdown of the jobs created this month, another big month for the government, which typically doesn’t continue at this pace. Construction labor has held up very well, even though housing permits have been falling for some time. The backlog from COVID-19 has been a jobs program for the U.S. as we are still slowly growing the housing completion data.

So the BLS jobs report is still pushing along, while wage growth is slowing down. Jobs Friday is one piece of the labor pie — we have two other data lines that we always need to keep an eye on to know the health of the labor market: job openings and jobless claims.

As the only person on Earth who talked about job openings data getting to 10 million in this recovery, I am surprised that job openings data is still around that mark. But that is off the recent highs of 12 million.

At this point of the economic expansion, I am putting more weight on jobless claims data than job openings (JOLTS). For me, the Fed doesn’t pivot, or the 10-year yield doesn’t break under 3.21%, until jobless claims break over 323,000 on the four-week moving average, and that isn’t happening either.

As we can see below, the Gandalf line in the sand has held up the entire year, even though it was tested many times.

As we can see below, the jobless claims four-week moving average is still far from breaking over 323,000. I chose that number using many different variables as I think when we crack about that level, it will be noticeable to everyone — even the Fed — that the labor market has broken.

From the St. Louis Fed: Initial claims for unemployment insurance benefits increased by 2,000 in the week ended May 27, to 232,000. The four-week moving average declined, to 229,500.

It’s important to understand the labor dynamics of this economic expansion. We had such a shock in the economy with COVID-19 and a strong labor market recovery that the make-up labor demand, which doesn’t get talked about much, is a significant reason we still see healthy numbers.

Also, it’s essential to understand the demographic difference now and what we had to deal with after 2008. The Baby Boomers are leaving the labor market, and every month that happens, they need to be replaced if demand is growing. This is why having a healthy number of younger workers not only helps with that but also provides replacement consumers, as those who leave the labor market tend to consume a bit differently than younger workers.

At this stage of the economic cycle jobless claims is the data line that matters most. Once jobless claims break above 323,000, then and only then I believe we can talk about a Fed pivot — first in their language and then possibly with rate cuts.

The Federal Reserve is scared to death of the 1970s inflation, and they genuinely believe that breaking the labor market is the best way to prevent that type of inflation from happening. As a country, we are fighting against a group of people stuck in the wrong decade with their economic mindset on inflation.

The headline jobs data beat estimates, but we did have 149,000 negative revisions to the previous month’s data. However, the cumulative labor data this week is a story of job growth returning back to normal and the Fed should be happy because the labor market has always been its target for pain.

From BLS: Total nonfarm payroll employment rose by 253,000 in April, and the unemployment rate changed little at 3.4 percent, the U.S. Bureau of Labor Statistics reported today. Employment continued to trend up in professional and business services, health care, leisure and hospitality, and social assistance.

Part of my COVID-19 recovery model on the labor market was that job opening should reach 10 million in this recovery. The Federal Reserve was terrified of this because this could send wages spiraling out of control, which means they had to kill this labor market. Nothing is worse to the Fed members than 1970s inflation.

That isn’t happening today. As we can see, wage growth has been cooling down, even with a tight labor market. Yes, wage growth has slowly decreased while millions of jobs were being created and we had massive job openings.

Even if we added other variables, such as hours worked, we could see the wage growth data cooling.

Also, this week we learned that the one data line Fed cares about, job openings, are no longer at 12 million. That number is down roughly 2.5 million since 2022. The Fed wants this to return to 7 million to feel more comfortable about the labor market. The reason I say 7 million is because that’s where we were before COVID-19 happened.

Job openings data

One thing to remember about this labor market and the historically low unemployment rate of 3.4% is If we didn’t have COVID-19, total employment in America would be 158 million to 159 million, just taking the pre-COVID-19 growth trends.

Based on demographics, I wasn’t a huge job creation person in the previous expansion. However, the shock of Covid created a significant fall in employment, and while it has been spectacular to see the rise of people being hired again, we are still in make-up mode as long as demand is growing.

If we didn’t have COVID-19, the total number of jobs would be higher today, but the job growth numbers would be lower. So, if some people are surprised about the job data at this cycle stage with all the rate hikes and bank drama, don’t forget this reality when considering the job growth we have seen since 2022. 

Total employment data: 155,673,000

Now let’s look at the internal report for more details.

One of the data lines I have stressed during the past decade is the unemployment rate tied to educational background. This is useful for housing data, especially when the next recession hits. Here is a breakdown of that data for those aged 25 and older:

• Less than a high school diploma: 5.4% (previously 4.8%)
• High school graduate and no college: 3.9%
• Some college or associate degree: 2.9%
• Bachelor’s degree or higher: 1.9%

Yes, you saw right, college-educated Americans with a Bachelor’s degree have an unemployment rate below 2%, which means they’re in great demand.

This report shows the sectors where the jobs were gained and lost. Most sectors this month had job gains, of course. But, if we take a three-month average of job gains in the private sector only, not accounting for the government, it’s running at 182,000 per month, the slowest pace of job growth since early 2021. Again, the Fed is getting what it wants, the labor market to cool off.

My 2023 forecast for the 10-year yield and mortgage rates was based on the economic data remaining firm, meaning that as long as jobless claims don’t get to 323,000, we should be in a range between 3.21%-4.25%, with mortgage rates between 5.75%-7.25%. Right now, jobless claims are at 242,000.

If the labor market breaks, the 10-year yield could reach 2.73%, which means mortgage rates could go lower, even down to 5.25% — the lowest end of my range for 2023. 

Even though we had a lot of drama this week in the market, my famous Gandalf line in the sand for the 10-year yield didn’t break. I’ve said for many months that this line is a tough nut to crack and on Friday afternoon before close the 10-year yield was around the 3.37%-3.42% level, as the chart below shows.

Overall, April was a good jobs report; nothing is wrong with the labor data now in a meaningful way, but we see that the growth of job creation is slowing down, which was always going to be the case coming back from the depths of COVID-19.

When does the labor market break, meaning jobless claims data shoot up much higher? Even though job openings data has noticeably come down, we haven’t seen jobless claims data spike out of control, which is the most critical data line we have with labor.

I joke that in the rock, paper, scissors game, jobless claims beat job openings always. The Fed knows that all their rate hikes have a lag before they hit the economy. We can clearly see that the fear of wage growth spiraling out of control is not happening and that, over time, the inflation growth rate will ease. 

What’s next?

Over the next 12 months, we will see more of an impact from the massive rate hikes and credit getting tighter from the banks, this is why it’s more critical than ever to track weekly economic and housing data, as we do in the Housing Market Tracker every week. Like every economic cycle post-WWII, if you know where to look for clues, they will guide you to the truth.

Total nonfarm payroll employment rose by 517,000 jobs from December to January, according to data released Friday by the Bureau of Labor Statistics. In comparison, the job market gained an average of 401,000 jobs per month in 2022.

“The pace of job growth had been trending down over the past six months, but January broke that trend,” Mike Fratantoni, the Mortgage Bankers Association’s SVP, said in a statement. “Recent data on unemployment insurance claims have indicated a stronger job market than the string of layoff announcements from the technology and financial sectors would suggest.”

Unemployment changed little from the month prior, with 5.7 million people unemployed for an unemployment rate of 3.4%. Overall, the unemployment rate has shown little net movement since early 2022.

“With the job market this tight, the Federal Reserve and financial markets will remain even more focused on the inflation data,” Fratantoni said. “We expect another 25-basis-point increase in the federal funds target in March, but do anticipate that the unemployment rate, which does tend to be a lagging indicator, will increase through the course of the year.”

However, the good news for the Fed is that wage growth has slowed.

“Yearly growth in average hourly earnings for service employees has declined from a peak of 6.1% in March 2022 to 4.5% in January 2023,” Odeta Kushi, First American’s deputy chief economist, said in a statement.“

The employment-cost index (ECI), a more comprehensive measure of wage changes, confirms the deceleration. According to the ECI, service-sector wage growth has slowed from 8% in the second quarter of 2022 to 6.9% in the fourth quarter. Further reduction in wage growth is the key to getting the Fed to pause its interest rate hikes. There is hope that as consumers pull back on spending, more wages will continue to decelerate.”

The construction sector added 25,000 jobs in January thanks to a big uptick in the number of specialty trade contractors (up 21,900 jobs). However, 16,500 of those specialty trade contractors are employed in the nonresidential sector. In addition, non-residential building construction added 4,100 jobs, compared to just 100 jobs in residential construction

“Residential building construction employment is up 3.5% year over year, and non-residential increased 4.9%. Residential building construction employment is now up 11.6% compared with pre-pandemic levels, while non-residential building construction employment just surpassed pre-pandemic levels this month,” Kushi said. “Residential building construction employment was little changed from December. The slowdown in single-family homebuilding may be putting some downward pressure on residential building job gains, and there is likely more of that to come.”

The real estate and rental and leasing services sector also experienced jobs growth in January, adding 4,100 jobs, with real estate adding 8,800 jobs and rental and leasing services losing 4,500.

In February 2020, a combined 300,000 were employed in “real estate credit” and as mortgage and nonmortgage loan brokers. As of November, there were roughly 354,800 people in those jobs, suggesting that the industry still has a large number of cuts to make in the coming months as the housing market slows to a crawl.

According to the latest BLS statistics, mortgage banking companies cut 2,500 jobs in December. Mortgage brokerages, meanwhile, shed about 800 jobs in December.

The lion’s share of the job growth in January came from gains in the leisure and hospitality sector (up 128,000 jobs), the professional and business services sector (up 82,000 jobs), and the health care sector (up 58,000 jobs).

But while the threat of further rate hikes still looms, industry analysts feel the strong jobs report is good news for the housing market.

“The upbeat jobs report provides more positive signals for the already rebounding housing market. The strong labor market will encourage the Federal Reserve to continue hiking rates this year which could stall the downward trend in mortgage rates. Buyers have been enticed back into the market as rates have dropped over the past few weeks,” Lisa Sturtevant, the chief economist at Bright MLS, said in a statement.

“But while rates are important, what matters most for buyers and sellers is the state of the economy, generally, and the stability of their own economic situations, in particular. So far, the economic outlook has been relatively sanguine. Recession concerns are generally coupled with predictions of a shallow downturn without significant job losses. Today’s employment report suggests we should be prepared for a busy spring housing market as growing confidence encourages prospective buyers to get back into the market,” Sturtevant said.

That low unemployment rate has to be driving the Fed nuts. Americans working and spending money is something they don’t want to see as they have forecasted a recession next year and are looking for the unemployment rate to reach 4.4%. This is a dark day for the Federal Reserve and its members, as their goal to put Americans out of work hasn’t worked out yet. 

From the BLS: “Total nonfarm payroll employment increased by 263,000 in September, and the unemployment rate edged down to 3.5 percent…Notable job gains occurred in leisure and hospitality and in health care.”

Here are the areas where the report says jobs were created and lost. The government sector has had difficulty hiring people; some didn’t bother to go back to work for them. Transportation and warehousing jobs falling isn’t a surprise since many companies have hired too many people in that sector.

We have to remember this about jobs, that even though we got all the jobs back lost to COVID-19, we are not back to the total levels we should be if COVID-19 never happened. So, think of it as playing catch up, as some of the consumption data is still positive for now.

Below is a breakdown of the unemployment rate and educational attainment for those 25 years and older. We have seen significant declines in the unemployment of Americans with the least amount of education in this report from August. Those with less than a high school diploma went from 6.2% to 5.6%, and those with just a high school education and no college went from 4.2% to 3.7% 

• Less than a high school diploma: 5.6%.
• High school graduate and no college: 3.7%
• Some college or associate degree: 2.9%
• Bachelor’s degree and higher: 1.8%

The labor market is still creating jobs, which is not what the Fed wants. Since all six of my recession flags are up, the only two data lines that I am focused on now with the economic expansion going into recession are the job openings data and the jobless claims data.

For those that have followed my America is Back recovery model and going into the expansion, you know that I was a big believer that job openings would get to 10 million. Unlike many people obsessed with the labor force participation rate, which I have deemed useless in the economic expansion and recession cycles, I am a fan of employment-to-population ratio data of the prime-age labor force ages 25-54. That is the bread and butter of the labor market, and it has made a good comeback in this recovery.

However, most Americans are always working, and as population growth slows and the Baby Boomers age out of the workforce, we need more labor in certain parts of the U.S. that lack prime-age labor force growth.

Job openings reached nearly 12 million in this recovery and have fallen to 10 million. This is a noticeable rate of change decline. Remember, the Federal Reserve wants wage growth to cool off, and some of that has been happening. However, the Fed prefers a job-loss recession to free up more labor.

Wage growth is a big issue for them as they see the employment cost index as a transmission to price inflation. Job openings falling recently is something the Fed is cheering for.

The unemployment rate is still historically low; we are not close to a significant job-loss recession. On the jobless claims data, I am targeting the 323,000 level in this data as the inflection point where the Fed will pivot from its hardline talking point. When I say 323,000, I mean the four-week moving average. Also, a note: usually, this data line takes a big hit due to any hurricane, so be mindful of this with the data coming up in the next few weeks.

See here for a chart from the Department of Labor on seasonally adjusted dataf or unemployment insurance.

When the labor market breaks, claims tend to shoot up fast, and the job-loss recession will have started. That will be the final nail in the coffin of this expansion which has created 22.5 million jobs since April 7, 2020, the day I wrote the America is Back recovery model, and when it was retired on Dec. 9, 2020.  

The Federal Reserve is using the labor market as cover for its aggressive rate hike language. I still believe their aggressive talk is trying to buy time for the inflation data to turn down so they can eventually pivot. So far, the jobs data gives them the cover to do this. If jobless claims rise above 323,000, I believe the entire discussion of the Federal Reserve and its members will shift dramatically. However, we aren’t there yet. So, I would take some of their more aggressive stance with a grain of salt for now. 

The Leading Economic Index is now in full-blown recession mode on a historical level. I recently presented my six recession red flag model to the Conference Board, and everything looks right to me. At the core of my progressive six-recession-flag model is this: that we maintain a recession watch but we’re not in a recession until the labor market turns.

At this point, is there any way to prevent a recession? Once all six recession red flags are up, history is not on our side.  However, due to the crazy swings that this COVID-19 recovery has given us with the wild bullwhip effect on data, I have come up with some plausible theories. Here are the two ways we can avoid this recession:

1. Rates fall to get the housing sector back in line.  Mortgage rates falling below 5% would be a plus for housing. This can happen with a weaker economy and a better mortgage-backed securities market as well. 

2. The growth rate of inflation falls, and the Fed stops hiking rates and reverses course, as it did in 2018. Some of the inflation data is cooling off a bit already and will find its way into the data lines. However, rent inflation won’t be coming down in the data until 2023 even though we see some coolness in that sector already. 

Can either of these scenarios happen? If we don’t have any more supply shocks like that of the Russian invasion of Ukraine, or from other variables that aren’t tied to the economy, the growth rate of inflation should be falling next year, due to rent inflation falling. I talked about it on CNBC recently. If that happens, if the Fed starts to pivot and then cuts rates as they did in 2018, we might have a shot here.

However, history has never been on our side once the six recession red flags are up. There is a first time for everything, but for now, most people are employed, and the fear is that the Fed is coming for your jobs. We will need to be more focused on the core data lines that matter to this economic expansion.

The unemployment rate dropped 0.2 percentage points from February bringing to 3.6%. The unemployment rate is now just marginally higher than its February 2020 level of 3.5%.

“Approximately 93% of the jobs lost in the pandemic have been regained,” First American deputy chief economist Odeta Kushi said in a statement. “If monthly gains continue at the March pace, we could return to the pre-COVID employment peak by July 2022.”

At 62.4%, the labor force participation rate, however, remains slightly below its pre-pandemic level of 63.4%.

The latest jobs report will likely ease some fears of those in the mortgage industry, which has struggled with a big spike in interest rates and continued low levels of housing supply.

“Although mortgage rates have spiked more than half a percentage point over the past two weeks, reducing affordability for many potential first-time homebuyers, the increase in wages will certainly somewhat help offset that hurdle,” said Mike Fratantoni, the Mortgage Bankers Association‘s chief economist. “And the confidence that many potential homebuyers have in their financial situation also benefits from this historically strong job market. We continue to expect that the Federal Reserve will move rates up expeditiously to counter surging inflation, and that this report only adds more urgency to their plans to do so.”

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In the construction industry, unemployment fell 6.0% in March, down from 8.6% a year ago. While overall employment in construction rose in March, residential building construction lost 2,600 jobs, but non-residential building construction gained 2,600 jobs. For the second month in a row, however, there was a solid uptick in residential specialty trade contractor employment, with an increase of 10,200 jobs.

“There was a big increase in hiring for residential specialty trade contractors this month, while residential building dipped slightly,” Kushi said in a statement. “Overall, a net gain of 7,600 jobs for residential construction, which is good news for this labor-intensive industry and for the prospect of more housing supply.”

The real estate sector gained a total of 14,000 jobs in March with real estate gained 6,300 jobs and rental and leasing services gaining 7,400 jobs. Overall, employment in financial activities is 41,000 jobs above its level in February 2020.

Mortgage bankers at the end of February had 290,200 employees, down 1,100 from January, according to the BLS data. Mortgage brokerage shops employed 137,300 workers in February compared to 135,700 in January.

Today, the Bureau of Labor Statistics reported that 199,000 jobs were created in December — a miss from estimates. They also reported we had 141,000 in positive revisions to the previous jobs report. The unemployment rate is currently at 3.9% and we had another big print from the household survey which showed 651,000 jobs gained. For men and women age 20 and over, the unemployment rate is currently at 3.6%.

Unlike the previous expansion, where the jobs recovery was slow, we have a much different dynamic this time around. Job openings are still over 10 million and I am still smiling here as I was the one person on Twitter finance that had been tweeting out #JOLTS 10,000,000 well before the job opening data took off. I have always believed that no country has a Dorian Gray labor market. People forget that job openings were above 7 million in the previous expansion before COVID-19 hit us. Nature, aging, and deaths are powerful economic forces, and robots never took all the jobs.

Jobless claims data recently hit levels last seen in 1969.



With that said, the household survey jobs data is much stronger, showing an average three-month gain of 723,000 versus the BLS data running at 365,000. We do have enough labor to get back to pre-COVID-19 levels and I do expect over time to see significant positive revisions to jobs data this year. I have been counting the months to see if my forecast would be correct.

With nine months left until the end of September 2022 (the milestone in my forecast), let’s see how much progress we need:

• Feb 2020: 152,553,000 jobs
• Today: 148,951,000 jobs
• That leaves 3,602,000  jobs left to gain in the next 9 months, which is 400,222 jobs per month. With a 3.9% unemployment rate!
  
  

Here is a look at the job gains and losses reported today. Construction jobs came in positive but we still have a fairly high level of construction job openings currently. The lack of construction productivity over the decades has been one reason why I have never believed in a housing construction boom in America. The other reason is that the builders don’t ever oversupply a housing market, so when demand fades, so will construction.

The builders have been complaining about labor for many years. However, the builders confidence index has picked up because they believe they can sell their product and make money since they have pricing power. This also means housing starts are rising. Don’t make it more complicated than it needs to be. 





Remember that when looking at jobs data, it’s always about prime-age employment data for ages 25-54. The employment-to-population percentage for the prime-age labor force is 1.5% away from being back to February 2020 levels. The jobs recovery in this new expansion has been much better than we saw during the recovery phase after the great financial crisis.

Education and employment

Most people who want to work in our country are employed on a regular basis. I know that some people blame COVID-19 for not going back to work, but context is key: the majority of the country’s population is working today. The part of the labor force with the least educational attainment tends to have a higher unemployment rate. On Twitter, I started the hashtag A Tighter Labor Market Is A Good Thing to remind everyone that the economy runs hot when we have a tighter labor market.  We want to see the kind of unemployment rates that college-educated people have spread to everyone, because we have tons of jobs that don’t need a college education.

The unemployment rate for those that never finished high school has been falling sharply lately, which means the labor market is getting tighter and tighter every month. You want to have this problem rather than the other way around.

Here is a breakdown of the unemployment rate and educational attainment for those 25 years and older: —Less than a high school diploma: 5.2%.
—High school graduate and no college: 4.6%.
—Some college or associate degree: 3.6.
—Bachelor’s degree and higher: 2.1%.

As you can see above, life is great for those looking for a job. For companies that need labor, it’s not the best news, but again, it’s first-world American problems — the economy is hot! As I have stressed from April 7, 2020, the U.S. recovery was going too fast, which would shock many people because they had no faith in their economic models.

With near record-low unemployment and massive job openings, you would assume mortgage rates should be skyrocketing, but they’re not.

The 10-year yield and mortgage rates

My 2022 forecast said: For 2022, my range for the 10-year yield is 0.62%-1.94%, similar to 2021. Accordingly, my upper end range in mortgage rates is 3.375%-3.625% and the lower end range is 2.375%-2.50%. This is very similar to what I have done in the past, paying my respects to the downtrend in bond yields since 1981.

We had a few times in the previous cycle where the 10-year yield was below 1.60% and above 3%. Regarding 4% plus mortgage rates, I can make a case for higher yields, but this would require the world economies functioning all together in a world with no pandemic. For this scenario, Japan and Germany yields need to rise, which would push our 10-year yield toward 2.42% and get mortgage rates over 4%. Current conditions don’t support this.

Yes, it does seem strange, we have the hottest economy in decades and inflation is hot but the 10-year yield as I write this is at 1.75%. Don’t forget the trend is your friend on bond yields and mortgage rates for decades. We had a major fall in headline inflation that didn’t take bond yields lower in the same way in 2009-2010 and now you’re seeing the reverse with a short-term spike in the inflation rate of growth with yields not rising either.

Even though we haven’t tested 1.94% yet, we are getting to an exciting area where we might be able to see the first real test of 1.94% since 2019. Keep an eye on the close of the 10-year yield today and see if we get some bond market sell-off next week. If not, the bond market can rally and yields can fall short term as we are oversold on the bond report.

Economic cycle update

Now for an economic update. So far, so good, even with the Omicron cases exploding higher, we simply don’t see the economic and market reacting any more as we have learned to consume goods and services with an active virus infecting and killing us each day. This has been the case since the second surge in 2020, and even though sectors of the economy will not perform at total capacity with cases rising, it’s just not like what we saw in March of 2020.

The St. Louis Financial Stress Index, a crucial variable in the AB recovery model, is still acting bored out of its mind with a recent print of -0.9201%. This will rise when the markets react to stress, so don’t assume we will be at these low levels forever. We still haven’t had a stock market correction of 10% plus since the March lows in 2020. 

The leading economic index has been very solid lately, when this data line falls for 4-6 months straight, then the topic becomes different. However, this hasn’t been the case, it bottomed in April of 2020 and has had a sharp rebound. 

Retail sales are still off the charts, but I don’t believe we can have the type of growth we saw last year. Moderation is the key to retail sales data going out, but what a crazy ride in 2021. Expect less purchases on goods and more service spending going out, especially when we are finally done with COVID-19.

The personal savings rate and disposable income are very healthy to keep the expansion going! Even though the disaster relief has faded from the economic discussion, both these levels are good to go as employment has picked up a lot from the COVID-19 lows.

However, just like I had an America is Back recovery model on April 7, 2020, I have recession models and raise recession red flags as the expansion matures. In the previous month’s jobs report, I raised one of the flags as the unemployment rate got to 4% and the 2-year yield was above 0.56%, which means the Fed rate hike is on.

Once the Fed raises rates, the second recession red flag will be raised. My job is to show you the progress of the economic expansion, into the next recession, and out — over and over again. My models don’t sleep! Once more red flags are raised, I will go over each and every single one. At some point in the future, I will be on recession watch, when enough red flags are up. However, we are not in that time yet. Even though I no longer say we are early in the economic expansion, we are still on solid footing.

After losing 3,000 jobs in August, the construction sector added 22,000 jobs in September. However, construction employment is still 201,000 jobs below its February 2020 level. This growth was also mostly driven by non-residential specialty trade contractors.

“The average hourly earnings of production and non-supervisory employees in construction are up 5.8% on a year-over-year basis in September – that’s the highest growth since 1982,” Odeta Kushi, the First American deputy chief economist said in a statement.

Despite showing very little net change in the number jobs thus far this year, housing starts in August 2021, were still 17.4% higher than a year ago, according to a report by the U.S. Census Bureau and the U.S. Department of Housing and Urban Development.

“Attract and retain – this labor-intensive industry needs more hammers to build more homes,” Kushi said. “Residential building is up, just over 5% compared with pre-Covid, while non-residential building remains 4.7% below its pre-pandemic level. Attracting skilled labor remains a key priority for construction.”

While job growth does remain slow, experts still believe the Federal Reserve will soon start tapering their asset purchase.

“This will likely lead to modest increases in interest rates, putting additional pressure on housing affordability at a time home-price appreciation is still very high,” Mortgage Bankers Association SVP and chief economist Mike Fratantoni said in a statement.

Based on the August employment report, U.S. jobs were expected to grow by 500,000 in September. This slower pace of hiring could be attributed to many different factors, but many experts feel that the timing of the data collection in mid-September during a surge in COVID-19 cases due to the Delta variant, may have played a role.

Another factor is an unexpected drop in the number of government jobs. Public sector payroll decreased by a net 123,000 positions, local government education jobs fell by 144,000 and state government education roles dropped by 17,000.

Still, other experts are placing some of the blame on a slightly lower labor force participation rate.

“A labor market with low labor force participation means many Americans are not participating in the economy or contributing to its growth,” Kushi said. “As of September, over 3 million workers were still missing from the labor force compared with February 2020.”

President Biden addressed the significant gains in a press conference Friday morning. Biden noted more than three million jobs have been created since he took office ― the most of any president in the first five months of their term. Of course, Biden’s presidency also began at a time when the U.S job market was 9.5 million jobs short of its pre-pandemic levels, so room for growth was inevitable.

Approximately 70% of the jobs lost at the start of the pandemic have been recouped. If monthly gains continue at the June pace, economists predict the U.S. could return to the pre-COVID employment peak by February 2022 – the same year some economists predict the housing market could regain its inventory footing.

“This is historic progress, pulling our economy out of the worst crisis in 100 years,” Biden said. “Put simply: our economy is on the move, and we have COVID-19 on the run.”

The unemployment rate, which is calculated from a different survey of households, ticked up to 5.9% from 5.8%, though it is important to note the details. Fewer workers reported working part-time for economic reasons, suggesting that they may now have full-time jobs. 

How lenders can attract the next generation of homebuyers

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The number of workers reported as “job leavers” also increased, lining up with the higher quit rate seen in other data, noted Mike Fratantoni, Mortgage Bankers Associations’ senior vice president and chief economist.

“There is a fair amount of churn in the job market right now as workers seek the best match, moving to jobs and sectors that are paying more due to the severe shortages in some segments of the both the job and housing market,” Fratantoni said.

As expected, gains were concentrated in the service-providing segment – which added 642,000 jobs – and in the leisure and hospitality sector, with 343,000 jobs gained. Those sectors of the economy were hit hardest by the pandemic.

As for the housing market, residential construction employment (including specialty trade contractors) rose by 15,200 last month, a more robust pace than in recent months, and a positive indicator for a sector facing severe supply constraints.

In May, the overall construction sector actually lost 20,000 jobs, though it was mostly concentrated among nonresidential specialty trade contractors. According to the BLS statistics, residential construction employment rose by a measly 1,900 jobs in May.

Residential building employment rose nearly 0.3% in June.

Construction employment is a non-substitutable input necessary to increase the both pace of housing starts and the housing stock, said Odetta Kushi, deputy chief economist at First American.

“More hammers, more homes” Kushi noted.