The Labor Department’s much-anticipated July jobs report released Friday morning offers a mixed bag for real estate. The upside is that a tight labor market will continue to underpin the housing market like a safety net for now. However, a weak increase in construction jobs promises little relief for the ongoing housing shortage and affordability struggles first-time buyers face.
According to the report, the U.S. labor market pulled off a solid, albeit not outstanding, performance in July with the addition of 164,000 new jobs. The unemployment rate held steady at 3.7%. Wage growth also increased one-tenth of a percentage point to 3.2%, exceeding expectations.
Amid its ups and downs in 2019, employment growth has cooled overall from an average of 223,000 monthly new jobs in 2018 to about 172,000 this year. July’s report also downwardly revised June’s spectacular 224,000 count to 193,000 (a big disappointment) while May’s worrisome numbers fell from 72,000 to 62,000.
Even so July marks 106 straight months of job gains and cements the longest period of economic expansion in U.S. history.
How the jobs report translates to real estate
The historically low jobless rate means the vast majority of people who want jobs right now can get them, and those who lose their jobs should be able to find another one quickly. Job security props up consumer confidence, fuels home buying demand, and protects the overall stability of housing.
However, housing has its own challenges to reckon with, as concerns of another inventory drought loom. The jobs report indicates that an anemic construction industry will continue to exacerbate the acute housing shortage, as affordability remains a struggle for buyers.
“The growing economy is continuing to create jobs,” said Lawrence Yun, Chief Economist for the National Association of Realtors, in a prepared statement. “Housing demand is clearly rising as a result. However, overall construction jobs increased by only 4,000 in July, indicating the supply of new buildings are not catching up.”
Inventory drought persists and could worsen
A July data analysis by realtor.com showed that inventory growth keeps dwindling—from 6.4% gains in January down to 2.8% gains in June.
This is in part due to the rate-lock effect that encourages more homeowners to stay put versus sell and an increased desire among older generations to age in place.
“It was only 18 months ago that the number of homes for sale hit its lowest level in recorded history and sparked the fiercest competition among buyers we’ve ever seen,” said Danielle Hale, Chief Economist for realtor.com, in a statement. “If the trend we’re seeing continues, overall inventory could near record lows by early next year.”
The bottom line is the market desperately needs more new construction in the mix to balance the scales, or the pace of home sales will keep moving slower than molasses.
While new-home sales rose 7% in June, the increase was based on a weak starting point after three months of downwardly revised numbers. Meanwhile, new residential construction spending actually decreased 0.5% from May to an annualized rate of $507.2 billion.
As the health care, financial services, and technology industries see steady growth in employment, the jobs report highlights the construction industry’s challenge to hire skilled labor as just one of the several barriers to ramping up new-home building. Yun suggests cities with “super-low unemployment rates of 2.7%” such as Austin, San Francisco, and San Jose will find it especially difficult to find new construction workers when people have so many other attractive routes to employment.
One positive sign, though, is that although existing-home sales dropped 1.7% from May to June, pending home sales have been on the rise for the second month in a row now which could accelerate the pace of closings in the near future.
In other major economic news, the Fed cut rates this week
The jobs report comes two days after the Fed’s big announcement that it would reduce the benchmark interest rate by 25 basis points from 2.25%-2.5% to 2.0%-2.25%, a policy tool that has historically been leveraged in times of economic distress.
The economy’s in good shape, but this round the Fed positioned the monetary easing policy as an opportunity to stoke the coals of a cooling economy proactively. Lower rates make it cheaper to finance investments and act as a stimulus to create jobs. As far as the rate cut’s impact on real estate, economists say that it could offer benefits to people with adjustable-rate mortgages and commercial loans, but the 30-year fixed will remain unchanged because the announcement had been anticipated.
If the rate cut does what it’s supposed to, then theoretically it could spur bigger job gains moving forward and keep employment high. Some would rather give rates room to drop in the event the economy does go sideways (the idea is, if they’re already low, you have nowhere to go). On the flip side the White House has called for the Fed to cut rates more aggressively.
However, some experts say that today’s respectable job numbers will discourage further monetary easing.
What about wages?
Home price growth and wage growth have started to align at 3.4% and 3.2% respectively, which helps ease affordability from the days when home price gains hit the double digits. As earnings increase it should give people more purchasing power to put toward a house.
However, wages haven’t reached the just-under 4% mark typical in a market boom so they could stand to improve. Plus, depending on what happens with inventory, another era of skyrocketing prices and fierce bidding wars could be around the corner.
Big picture: What’s in store for real estate and the economy?
The July jobs report aligned closely with analyst expectations and confirmed that the fundamentals of the economy are still in good working order. Employers are hiring. People have money to spend. Houses remain an attractive purchase for Americans.
But until the global outlook improves and more homes come on the market, people will keep their eyes on the horizon for a recession and housing will perform at a mediocre level.
“In the absence of an all-out trade war and with the Federal Reserve willing to be accommodative in cutting interest rates, the demand for housing and the demand for commercial real estate buildings will remain solid,” says Yun. “The question is whether the supply will be adequately met.”