Employment Report Disappoints but Probably Won’t Delay Federal Reserve’s Tapering Plan

The September employment report disappointed analysts; will it also complicate the Federal Reserve’s plan to begin withdrawing the monetary support that has cushioned the economy throughout the pandemic?

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Anyone looking for a clear assessment of the housing market won’t find it in the February housing statistics: Existing home sales plummeted, pending sales rose (though not by much); new home sales and single-family starts beat expectations, but permits fell more than anticipated; and inventory levels remained crimped, pushing home prices up and beyond the reach of many prospective first-time buyers.

Despite that decidedly mixed picture, Freddie Mac‘s chief economist, Sean Becketti, is predicting “the best year in a decade for housing. “Low mortgage rates, robust job growth and a gradual increase in housing supply will help drive housing markets forward,” he wrote in a recent report.

For the moment, however, some significant headwinds seem to be slowing the momentum Becketti and others are anticipating.

Inventory levels remain a critical problem, blunting the positive effects of a strengthening economy that is increasing buyer demand. Inventories of existing homes for sale increased in February, but the 1.88 million total was still 1.1 percent lower than the year-ago level, and the 4.4 month’s supply remained well below the 6 months deemed necessary for a healthy market.

Fixing the Blame

Realtors and home builders continue to spar over who or what is responsible for the inventory shortage. Lawrence Yun, chief economist for the National Association of Realtors (NAR), has complained for months that builders simply are not producing enough new homes to meet the demand. David Crowe, the NAHB’s chief economist, fired back recently, insisting that it is existing homeowners who are creating the problem, because they aren’t selling their homes and moving up.

“I don’t believe there is a shortage of new housing inventory,” he told Housing Wire. “There is a shortage of existing housing on the market, and that [creates] a trickle effect. If the existing homeowners are unwilling to sell, they are not released to buy the new homes. The new home market is waiting on existing homeowners selling their current home to build more new homes,” he insisted. Buyers looking for new homes, he noted, are able to find them.

Anecdotal evidence suggests that some buyers, unable to find existing homes, end up buying new ones instead. That may explain, partly, why existing and new home sales moved in opposite directions in February. Existing home sales, which sizzled in January, fizzled the following month, plunging by more than 7 percent; new home sales increased by 2 percent, beating expectations, but still remaining more than 6 percent below the year-ago level.

Reversing a 3 percent decline in January, pending existing home sales increased by 3.5 percent in February. Although that represents the largest gain in a year, it hardly warrants a standing ovation, according to Rick Sharga, chief marketing officer at Ten-X, who pointed out that the index is less than 1 percent higher than it was a year ago. “The year-over year number is the one to pay attention to,” he told DS News, and that statistic, he said, suggests that next month’s existing home sales “may not give us much to get excited about.”

New Listings Needed

The NAR’s Yun found the pending sales increase more encouraging, but remained cautious about the outlook. “The key for sustained momentum…is a continuous stream of new listings quickly replacing what’s being scooped up by a growing pool of buyers,” he noted in a press statement. “Without adequate supply,” he warned, “sales will likely plateau.”

Builders seem to be ramping up new home construction – albeit moderately and inconsistently. Housing starts overall increased to an annualized rate of 1.18 million units in February, with the single-family sector posting its largest gain (7.2 percent) in more than eight years. While building permits declined by more than 3.1 percent, single-family permits eked out a 0.4 percent increase that was better than expected, but not enough to bolster builders’ sagging spirits.

The NAHB’s confidence index remained unchanged in March after dipping by 3 percent in February to reach a nine-month low. Although encouraged by the buyer traffic they are seeing, builders were less optimistic about the six-month outlook for new home sales.

A Zillow survey found consumers have also lost confidence in the housing outlook. The company’s overall U.S. Housing Confidence Index fell to 69.9 in January compared with 67.4 a year ago, with confidence in the near-term outlook falling more steeply – from 74.1 to 71.8.

Rising home prices may have something to do with that trend. The closely watched Case-Shiller index of 20 metropolitan areas increased by 5.7 percent year-over-year in January – more than twice the inflation rate. A separate Realty Trac survey found home prices exceeding wage gains in two-thirds of the nation’s housing markets.

“Affordability is an Issue”

Yun has detected evidence of affordability pressures in recent NAR surveys. “We’re seeing fewer renters interested in buying,” he told Bloomberg News. “They’re indicating affordability is an issue.”

The March employment report offered some hope for relief on that score. Employers added 215,000 workers to their payrolls and, significantly, hourly earnings increased at an annual rate of 2.3 percent. Although stronger than expected, the report didn’t alter the Federal Reserve’s decision to delay additional increases in its benchmark interest rate.

Fed Chairman Janet Yellen told reporters that while the Fed remains confident about the U.S. economy, “prudence” required caution in the face of uncertainty about the global economic outlook. “What you see here is a virtually unchanged path of economic projections and a slightly more accommodative path” for monetary policy, she told reporters following the Federal Open Market Committee’s (FOMC’s) March meeting.

The official FOMC statement said: “The committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate, [which] is likely to remain, for some time, below levels that are expected to prevail in the longer run.” Economists interpreted that to mean that mortgage rates aren’t likely to increase much, if at all, in the near term.

Although stable loan rates will ease affordability pressures created by rising prices at least somewhat, some economists remain concerned about the housing outlook. Lindsey Piegza, chief economist with Stifel, is among them.

“With minimal income growth, the threat of rising rates (at least at some point in the future), and declining confidence regarding the sustainability of the U.S. recovery, many potential buyers remain sidelined either from a lack of ability or willingness to make a home purchase,” she told HousingWire. “Going forward, housing is likely to remain a sector of support for the recovery,” she added, “but hardly the catalyst to above trend growth.” While housing is no longer “a large net drag” on growth, she noted, “neither is it the primary driver of the economy as it once was.”