Update on Condo Insurance Issue

As I reported two weeks ago, many financial institutions have stopped issuing mortgages for condo projects that lack hurricane coverage where the policy limit is less than 100% of the estimated value of the project’s improvements.

 

I do have some good news.  For conventional conforming loans (those loans sold to Fannie Mae and Freddie Mac), there’s been clarification of their requirement for hurricane coverage.  Their requirement is that the policy must have 100% replacement cost coverage.  Here’s the odd thing.  While many of the buildings I listed 2 weeks ago do not have hurricane coverage whose limit is 100% of the value of the project’s improvements, those policies do feature 100% replacement cost coverage.

 

Here's an example of a large complex here in Honolulu.  Here are the limits on the insurance they carry:

 

 

 

The buildings are valued at almost $475,000,000.  The hurricane coverage (base policy plus supplemental policy) is only $100,000,000.

 

But where you look at the Certificate of Insurance, you get a different picture:

 

 

The policy above is acceptable for conventional conforming financing.  These are the types of loans not kept in a bank’s portfolio, such as jumbo loans.  There’s still been no change in the stance the local banks have taken that require the hurricane policy coverage equals the building’s replacement cost.

 

It is important to note that the project may have other characteristics that preclude it from getting Fannie/Freddie type financing.  In that case, the buyer is still limited in financing options.

 

 

 

 

And now the week’s economic news…….

 

Friday’s Jobs Report – Don’t Let the Numbers Fool You!

The Bureau of Labor Statistics (BLS) reported that there were 353,000 jobs created in January, which was almost double the 180,000 expected.  There were 126,000 jobs due to positive revisions to the previous two months added to the strength of the current month’s report.

 

This report is in complete contrast to Thursday’s ADP report, which only showed 107,000 jobs created.  But it is important to note that the BLS plays games with their data, especially with the report every January.

 

January is always a heavily adjusted month, as new benchmarks, seasonal adjustments, and population controls are factored in.  The raw jobs data showed there were 2,635,000 jobs lost in January, but the seasonal adjustments made by the BLS resulted in adding 2,988,000 jobs.  This gave us the reported net gain of 353,000.  Magic!

 

Average hourly earnings, which measures wage pressured inflation rose 0.6%, which was double expectations.  Year over year, average hourly earnings rose from 4.4% to 4.6%, which was hotter than estimates.  This is opposite of what ADP reported, which showed significant declines in wage pressures in the same month.  ADP is the nation’s largest payroll processing company.  They track 10,000,000 employees for their report, and importantly, track those employees over time.  The government uses computer modeling to “guess” their numbers.

 

Average weekly hours worked declined again from 34.3 to 34.1, falling to the lowest level since 2010, excluding the pandemic.  This is a big deal and is why hourly earnings rose.  People are working less hours but getting paid more.  BUT overall, they are taking home less money.  The evidence for this is the Average weekly earnings, which were flat in January compared to December, and fell from 3.8% to 3.9% year-over-year.

 

Think of it this way.  On average, the country’s hourly workforce is working 30 minutes less per week compared with January of 2023.  This is the same thing as losing 2,400,000 jobs.  That’s calculated by measuring the same output in the economy but doing so with less manhours worked.

 

There are also two components to the monthly BLS report.  The business survey is where that headline jobs gain/loss headline comes from.  The second component is from the household survey that gives us the unemployment rate figure.  The Household Survey showed greater weakness than the business survey.

 

The Household Survey has its own job creation component, and it showed a loss of 31,000 jobs!  You would feel that would lead to the unemployment rate rising for the month, but the labor force was reduced by 175,000 people.  For all the wrong reasons, the unemployment rate stayed the same at 3.7%.  It should have moved higher.  If you were to look at what’s called the “U-6 unemployment rate” which doesn’t remove people, that rate has climbed steadily for the past few months.  U-6 was 7.0% in November, then 7.1% in December, and now 7.2% in January.

 

 

In News of the Fed Meeting on Wednesday

As expected, the Fed made no change in rates.  While some investors had hoped for specific guidance on the timing of rate cuts, officials again chose to retain flexibility to react to incoming economic data.  The meeting statement noted that officials need "greater confidence" that inflation will fall to their 2.0% target before loosening monetary policy.  Fed Chair Powell said that additional inflation readings consistent with recent trends would boost confidence, but he suggested that a rate cut at the next meeting in March is unlikely.  Most investors now anticipate that the first rate cut will take place in May.

 

 

 

Next Week

Investors will continue to watch for Fed officials to elaborate on their plans for future monetary policy.  It will be a very light week for economic reports.  The ISM national services sector index will be released on Monday and the Trade Deficit on Wednesday.  Treasury auctions on Wednesday and Thursday also might influence mortgage markets.

 

 

Until next week…….