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28 FED OWNS NEARLY 29 PERCENT OF ALL OUTSTANDING MBS e Federal Reserve's plan to reduce the amount of agency mortgage-backed securities (MBS) and U.S. Treasury securities (Treasurys) it owns will run off slower than its targeted amounts, according to a recent report from the Urban Institute titled "Normalizing the Federal Reserve's Balance Sheet: e Impact on the Mortgage-Backed Securities Market." e authors of the report, Laurie Goodman, Co-director of the Housing Finance Policy Center, and Bing Bai, a research associate for the Urban Institute, examined the Fed's near-term path mortgage portfolio to understand when the portfolio will normalize. Starting in November 2008 and ending in September 2014, e Federal Reserve began buying large quantities of assets from the private sector as a method of quantitative easing. As of September of this year, the Fed now owns $1.77 trillion of MBS (nearly 29 percent of all outstanding MBS) and $2.45 trillion of Treasurys. Based on similar assumptions made by the Fed, Goodman and Bai believe there will still be $1.18 trillion of MBS on the Fed's books after their balance sheet normalizes. e researchers also believe the Fed should take advantage of the investment period left to do more rebalancing, as well as take additional action to help launch the single Government-Sponsored Enterprise security. Based on assumptions from two separate surveys of primary dealers and market participants released by the Fed in July 2017, the researchers found the Fed's baseline portfolio in 2025 will be $2.84 trillion. is will be larger than levels prior to the crisis but smaller than the current level of $4.46 trillion. As the winding down begins, the projected mortgage runoffs during the first year will total $197 billion, providing a $120 billion runoff and a $77 billion reinvestment. e Urban Institute believes for the first year and the year after, the paydowns in this base case generated by the portfolio will be insufficient for covering the targeted runoff. Regarding Treasurys, Goodman and Bai project there will be $369 billion in paydowns in the first year, producing a $175 billion runoff and $194 billion reinvestment. HOMEBUILDERS FACE LABOR SHORTAGE AS UNEMPLOYMENT DROPS In November, the U.S. Bureau of Labor Statistics released its Employment Situation Summary for October 2017—reporting that the nation's unemployment rate decreased by 0.1 percentage point to 4.1 percent, and the number of unemployed persons decreased by 281,000 to 6.5 million. Since the beginning of 2017, the unemployment rate has declined by 0.7 percentage point, and the number of unemployed persons has decreased by 1.1 million. According to Doug Duncan, Chief Economist at Fannie Mae, the employment situation summary is underwhelming—as the much-anticipated rebound in October nonfarm payroll was less than market expectations at 261,000. And even with the 90,000 upward revisions in the hurricane-affected months, the average monthly job gain for the last three months came in at 162,000—a slowdown from the year-to-date monthly average gain through July of 171,000. Additionally, flat average hourly earnings brought annual wage growth to 2.4 percent, a four-tenths payback from the solid gain of the prior month, when the hurricanes prevented many low-wage employees from working. "e seemingly positive headline in the household survey masked some bearish details, as the one-tenth decline in the unemployment rate occurred amid a 0.4 percentage point plunge in the labor force participation rate, the biggest monthly decline in four years," Duncan said. Duncan continued, "One silver lining was the large drop in the broadest measure of labor underutilization, U-6, to 7.9 percent, matching the lowest rate of the last expansion. e bottom line is that slack in the labor market is receding, but the hiring trend is slowing and wage gains remain muted." In addition, according to analysis from Mark Fleming, Chief Economist at First American, despite overall declines in unemployment, sectors like homebuilding are still facing labor constraints. "Homebuilding, particularly housing starts, faces a number of headwinds at the moment, including access to buildable lots with the appropriate infrastructure, rising regulatory costs, increased building material costs, and labor constraints," said Fleming. "Homebuilding still requires manual labor as a key input into the production process and productivity gains in this sector have lagged behind overall productivity improvements . . . While the gains made this month are a positive sign, homebuilders would like to hire more labor, if only they could fill those openings."

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