In each Economic Update, the Research staff analyzes recently released economic indicators and addresses what these indicators mean for REALTORS® and their clients. Today’s update discusses jobless claims.

• It’s a very volatile period for the jobs market: initial claims for unemployment insurance for the week ending July 28 are up by 8 thousand claims at 365 thousand from last week’s revised (upward) estimate, based on data released by the Department of Labor.
• However, due to huge drops in claims in some weeks in July, the average number of intial claims in July fell to 365 thousand from June 2012 levels and over the same period last year.

• In a related development, ADP,  a payroll processing company, released yesterday a non-farm payroll of 163 thousand in July, down from 172 thousand in June. The official employment data will released tomorrow but based on the insurance claims data and the ADP Payroll data, we expect to see the same modest net job increase of about 80 thousand in July with the unemployment rate still hovering at 8.2 percent.   NAR Research Chief Economist Lawrence Yun projects a net job increase of 1.5 million jobs in 2012.

• Total existing-home sales declined 5.4 percent to 4.37 million in June, however they are up 4.5 percent from a year ago.
• The market is gaining, in part due to pent-up demand among all home buyers and tight inventory throughout the market, but first time home buyers looking for properties in lower price ranges are especially challenged.
• Prices are rising, partly due to fewer distressed homes on the market, up almost 8 percent from a year ago.
• The national median existing-home price for all housing types was $189,400 in June, up 7.9 percent from a year ago.
• June also marks four back-to-back monthly price increases from a year earlier. The last time we saw this was February to May of 2006.

Regional EHS Data

• Regionally, existing-home sales in the Northeast dropped 11.5 percent to an annual pace of 540,000 in June but are 1.9 percent above June 2011. The median price in the Northeast was $253,700, down 1.8 percent from a year ago.
• Existing-home sales in the Midwest slipped 1.9 percent in June to a level of 1.02 million but are 14.6 percent higher than a year ago. The median price in the Midwest was $157,600, up 8.4 percent from June 2011.
• In the South, existing-home sales declined 4.4 percent to an annual pace of 1.73 million in June but are 5.5 percent above June 2011. The median price in the South was $165,000, up 6.6 percent from a year ago.
• Existing-home sales in the West fell 6.9 percent to an annual level of 1.08 million in June and are 3.6 percent below a year ago. The median price in the West was $233,300, up 13.3 percent from May 2011. Given tight supply in both the low and middle price ranges in this region, sales in the West are stronger in the higher price ranges.

Admittedly the pace of job creation is sluggish. Still, there are more than 4 million jobs today compared to the low point in early 2010. Under the ideal case of no economic fluctuation, a steadily expanding economy, and a 5 percent unemployment rate, there would be 10 million more jobs than what we have today. But the economy is never perfect and we have to deal with what we have.

Some states have been very fortunate to escape economic hardship altogether, with continuous job gains year after year. North Dakota in particular has been a shining example. In the latest jobs figure, North Dakota added 26,300 jobs over the past 12 months. The total job count has grown from 320,000 to 420,000 in the past 10 years, an astonishing 30% growth while the rest of the country was barely treading water. North Dakota also does not have any foreclosure problem to speak of.

Michigan had been bleeding badly – a decade-long economic depression state – before a rebound in recent years. The Wolverine State created 62,000 net new jobs in the past 12 months and  nearly 300,000 in the past three years. The recovery in jobs is one big reason for a home sales recovery in Michigan.

After a hard landing, Phoenix is rapidly turning around with solid 45,000 net new jobs over the 12 months and a home price appreciation running at 20 percent or so on an annualized pace since the beginning of the year (that is, price gains of 2.0 percent or better each month since January). Jobs and the housing market will work in tandem with one helping the other.

Other areas of note in job growth are the following:

• If you cannot stand the cold in North Dakota, try Lafayette, Louisiana, where the job base has rocketed forward by 10 percent in a single year.
• A better chance of finding a job in Northern California than in Southern California.
• Plenty of jobs in Fayetteville, Arkansas, but hardly any in the rest of the state. The same story is happening in the northwest, with Seattle getting all the new jobs in the state of Washington.
• Recession-proof government protected jobs in the D.C. area are beginning to slow down. Not job cuts, but job creation is beginning to slow.
• Tampa is better than Orlando if looking for a job in central Florida.
• Houston is lively with 85,000 new jobs in the past 12 months, an equivalent to a stadium full of people. But so is Austin, Dallas, San Antonio, and just about anywhere in Texas.
• Missouri and Wisconsin were the only states with fewer jobs today than 12 months ago.

A full list of metro-level job market conditions is here.

In each Economic Update, the Research staff analyzes recently released economic indicators and addresses what these indicators mean for REALTORS® and their clients. Today’s update discusses construction spending.

• The housing market recovery is clearly having a positive impact on the economy.  A modest commercial real estate rebound is also positively contributing to the economy.
• According to today’s data, construction spending squeaked out a small gain in June and is now 7 percent higher compared to one year ago.  Residential construction (up 10.7 percent) is doing better than commercial construction (5.4 percent).  Due to tight budgetary conditions at all levels of government, public construction spending was 3.7 percent lower from one year ago.
• In examining various subcomponents, private multifamily construction (not public multifamily) has zoomed up with an impressive 49 percent gain, though admittedly from very low levels.  Both hotel/lodging and manufacturing plant construction made nice gains of 20 percent or better.  Educational facilities by private schools and universities have been rising while spending for public school buildings has been falling.  Spending for church and other religious buildings has been on a 10-year decline.
• Without the current housing market recovery, the U.S. economy would be teetering on a fresh recession with job losses.  Fortunately, the U.S. will avoid a recession as long as the real estate market is permitted to recover without any hindrance.  Namely, any new Washington policy rule that mandates a higher down payment to get a mortgage or tinkers with the mortgage interest deduction will quickly derail the housing market recovery.

The average rate for a 30-year fixed rate mortgage hit another all-time low last week according to Freddie Mac. Last week’s average rate was 3.49 percent, breaking the 3.5 percent threshold and more than a full point below the 4.55 percent average from a year ago at this time. While the historic rate means great things for affordability, it also appears to be historically difficult to qualify for these record low rates.

Record rates are a boon to consumers. The monthly payment on a $200,000 mortgage at the rate reported by Freddie Mac last week translates into a monthly principle and interest payment of $897 compared to $1,019 last year at this time. That is a savings of $122 per month and more than $13,000 over a 9-year period, the average tenure of a homeowner.

That all sounds great, but the clutch of would-be buyers who qualify for these rates tightened in recent years. Based on data provided by Amherst Securities [1] and Ellie Mae, the current average [2] FICO scores on loans (originated) by the FHA was 707 in May, which is an improvement from 2011 when the rate averaged 709. However, the average FICO score for a denied loan application was 669 in May, well above the 656 average for originated loans back in 2001 and above to the 660 [3] mark used by the Office of the Comptroller of the Currency (OCC) to delineate prime loans.

Likewise, standards on conventional loans, those financed at Fannie Mae and Freddie Mac, increased from an average of 711 in 2001 to an average of 765 in May of this year. What’s remarkable is that the average FICO of a rejected purchase application was 724 in May, well above the average FICO of an originated loan back in 2001.

Data for average characteristics of mortgages that are originated do not offer a full picture of the tightness of underwriting. However, the data from Ellie Mae which provides insight into the characteristics of denied loan applications delivers more insight into how tight overall underwriting standards are. It may be the case that the average FICO does not account for other factors that disqualify a borrower such as a low downpayment, difficulty documenting income (e.g. workers without payroll stubs like consultants or contractors) or high debt-to-income (DTI) ratios. However, a high average FICO for denials would suggest limitations on underwriters’ ability or willingness to take into account mitigating circumstances for low downpayments or high DTI ratios during the origination process.

Finally, the high average FICO of denied applicants suggests an impact on would-be mortgage applicants. Tight underwriting standards may already have signaled to less creditworthy borrowers that they are likely to be rejected and thus they may not apply for loans. Likewise, credit overlays such as the GSE’s loan level pricing adjustments may also preclude would-be applicants with less than pristine credit, high DTIs like first-time buyers, or small downpayments from applying for loans as these charges result in higher upfront costs or higher effective mortgage rates.

Tight underwriting in the current environment comes as little surprise to most practitioners. This data provides better insight to how current underwriting compares historically and more importantly it provides insight into the quality of borrowers that are being denied. While home sales have experienced their strongest spring in years, the over correction in lending standards is holding the housing market back from a robust recovery.

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[1] Amherst Securities analyzed the Corelogic dataset (purchase and refinance) to estimate average borrower characteristics from 2001 to 2011. Monthly data on purchase applications and originations provided by Ellie Mae is used to supplement the Amherst analysis for 2012. The Corelogic database represents roughly 80 percent of outstanding mortgages, while the Ellie Mae data survey covers roughly 20 percent of annual mortgage originations.

[2] Weighted averages for both denied and originated loans at the FHA and GSEs were created using purchase and refinance originations weighted by the national shares reported by Ellie Mae. Consequently, the estimates may slightly understate the FICOs of the GSEs because of the high current share of GSE refinance volumes.

[3] http://www.occ.treas.gov/publications/publications-by-type/other-publications…