Anemic Employment Report Reflects Pandemic’s Continuing Drag on the Nation’s Economy

The December employment report was a good news-bad news-good news story. The good news:  Employers added nearly 50,000 jobs and the unemployment rate fell, after remaining essentially flat for the previous two months.

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After several months of declining home sales, analysts have begun using the f-word ─ falling ─ to describe the housing market’s trajectory. “The housing market is stumbling through its longest slump in four years, as the divergence between a booming U.S. economy and weakening home sales that many had dismissed as temporary now looks poised to continue,” the Wall Street Journal reported.

A combination of rising mortgage rates (one percent higher than they were a year ago, relentless home price gains, inventory constraints, and the new tax law (which reduced the appeal of the mortgage interest deduction) have largely undercut the momentum a strong economy should be producing.

The bad news for housing continued in September with declines in both new and existing home sales. The new home market stumbled badly, as sales fell for the fourth consecutive month, plunging 5.5 percent below the August level and a stomach-churning 13 percent below the year-ago pace. The decline was steepest in the Northeast and West – a result some analysts attributed to the cap on property tax deductions in these high-priced housing markets.

“This number really sucked," Peter Boockvar, chief investment officer at Bleakley Advisory Group, wrote in a bluntly worded note to investors. “Anyone watching home builder stocks or watching the data all year should not be surprised but its's clear this important area of the US economy, highly sensitive to price and rates, has obviously slowed sharply."

The picture for existing homes was no brighter, as sales posted their seventh consecutive year-over-year decline, falling 4.1 percent below the year-ago level and failing once again to reach projections the National Association of Realtors (NAR) has been scaling back all year.

Lawrence Yun, the NAR’s chief economist, attributed the September sales pace – the lowest in three years, to the combination of rising mortgage rates and sparse inventories, which continue to squeeze affordability for many buyers. “

A Clear Market Shift

“Without a doubt there is a clear shift in the market,” Yun said in a press statement, noting recent evidence that foot traffic has slowed “notably” in previously “super-heated” markets.

There was some good news in the September reports, primarily in the NAR’s pending sales index, which posted its first increase in four months, inching up by 0.5 percent. But the index remained 1 percent below the year-ago level, failing to break a nine-month streak of year-over-year declines, and leaving markets starved of the listings they need to counter rising prices.

“Rising prices and mortgage rates knocked out some buyers and spooked others into waiting to see if mortgage rates reverse or prices decline — even though both of these outcomes are unlikely," Danielle Hale, chief economist at Realtor.com., told WSJ.

September’s strong employment report (a larger than expected gain of 250,000 jobs and a 3 percent annual jump in wages) squelched any hope that the Federal Reserve will veer from its rising rate course, which means mortgage rates, already nearing 5 percent, are likely to move higher next year, further straining the struggling housing market.
Home builders, hampered by the increasing cost of building materials, a shortage of skilled labor, and uncertainty about market trends, have not been producing new housing fast enough to ease the inventory shortage, and that isn’t likely to change either, analysts say.

Reading the Signs

"Builders can read the early signs of a cooling housing market as well as anyone — including a slowing in home value growth, rising mortgage rates and an uptick in price cuts," Aaron Terrazas, senior economist at Zillow, told CNBC. "With an increasingly cloudy economic outlook over the next two years, builders may be growing weary of putting sticks in the ground that won't be delivered to buyers for several months' time ... having only barely recovered from the last downturn, no one is eager to be swept away in the next economic storm brewing just beyond the horizon.”

Ordinarily, owners selling their existing homes to trade up would be generating new listings. That has certainly been the case in past recoveries, but not in this one. Although rising prices have created the equity cushion owners need to trade up, rising interest rates are creating a disincentive for those with lower-rate mortgages to sell. The average tenure for homeowners in their existing home has increased from an average of 4 years in 2007 to 10 years in 2018, according to data compiled by First American.

“There is less incentive to sell your home if borrowing the same amount from the bank at today’s rates will be more expensive than your existing monthly mortgage payment," Mark Fleming, chief economist at First American, noted in a recent report. "As rates rise, many existing homeowners are increasingly financially imprisoned in their own home by their historically low mortgage rate."

Divergent Trends

The amalgamation of headwinds in the housing market have created an unusual dichotomy between an economy that is growing smartly, and a housing market, moving in the opposite direction. That situation can’t last indefinitely, analysts agree, suggesting one of two scenarios: Rising wages could overcome the affordability obstacles that are keeping many buyers on the sidelines and increase home sales; or the sales decline could create a serious drag on economic growth.

Glenn Kelman, chief executive of real-estate brokerage Redfin, sees cause for concern. In an interview with DS News,” he cautioned: “If this is the first chink in the armor ─ if other parts of the economy, driven by increases in rates, start to weaken and if consumer confidence starts to wane, then I think it could be the beginning of a really soft year.”
David Blitzer, who manages the Case-Shiller home price index, shares that concern. “Housing, because it’s interest-rate sensitive, turns up first in a recession and probably turns down first in a boom, but with a long lead time,” he told MarketWatch. “I don’t think we’re going to be in a recession by Christmas this year, and no bets for next year,” he added. But [current trends] probably do indicate that not everything is coming up perfectly roses.”