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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Concerns about rising interest rates and shrinking inventories, bubbling beneath the surface of real estate discussions for much of last year, have boiled over, dominating recent news reports and raising questions about the outlook for this year.

As expected, the Federal Reserve, which has been telegraphing its intention to boost interest rates, did just that following its March meeting,

As expected, the Federal Reserve, which has been telegraphing its intention to boost interest rates, did just that following its March meeting, ratcheting the Fed’s benchmark rate up a quarter of a point, to a target range of 0.75 percent to 1 percent. Also as expected, Fed officials indicated that additional increases are likely – two more quarter-point hikes this year and three in 2018.

The Fed’s action came after February’s robust employment report: Employers added 235,000 workers to their payrolls, pushing the unemployment rate down slightly, to 4.7 percent. Although the job total beat expectations (and piggy-backed on an equally strong January report, that was revised upward to 238,000) wage growth, at a still tepid 2.8 percent, fell short of analysts’ projections. But with the inflation rate nearing the Fed’s 2 percent target and other economic indicators signaling strength, analysts had predicted accurately that the Fed would find the argument for boosting rates “compelling.”

The official statement by the Federal Open Market Committee, the Fed’s policy-making arm, noted that the economy’s moderate” growth, an uptick in business investment, continued strengthening in the labor market and a “moderate” increase in household spending supported the decision to raise rates.

"It is important for the public to understand that we're getting closer to reaching our objectives," Fed Chair Janet Yellen said during her post-meeting news conference. “The simple message is ─ the economy is doing well," she added.

Affordability Problems Loom

While the rate hike signals confidence in the economic outlook, it also portends potential affordability problems for home buyers. Those problems haven’t surfaced yet, however; at least, not in a big way. Existing home sales increased by 3.3 percent in January compared with the December total. The annualized sales rate of 5.69 million units was the highest in a decade. New home sales increased by 3.7 percent – a little short of expectations, but still reflecting strong underlying demand, analysts agreed.

Lawrence Yun, chief economist for the National Association of Realtors (NAR), credited “resilient” consumers and a strong labor market, helping to offset the headwinds created by higher mortgage rates and a skimpy supply of homes available for sale. The 3.6 months inventory was unchanged from December.

“Market challenges remain,” Yun said in a press statement, ‘but the housing market is off to a prosperous start as homebuyers staved off inventory levels that are far from adequate and deteriorating affordability conditions.”

First time buyers remained relatively active, accounting for 33 percent of January sales, compared with 32 percent in December. But rising prices and an acute shortage of entry-level homes are creating challenges for this segment of the market, David Berson, chief economist for Nationwide, told Housing Wire. “We have concerns that continued supply constraints in the housing market will allow outsized house price gains again in 2017, especially hurting potential first-time homebuyers,” he cautioned.

Prices Still Rising

Home prices continued to rise in the final months of last year, with no indication that the upward trajectory will change any time soon. The S&P/Case Shiller 20-city index increased by 5.6 percent in the fourth quarter– the fastest pace in nearly three years.

There are some indications that rising prices are beginning to take a toll. The NAR’s Pending Home Sales Index – a predictor of future activity – fell by 2.8 percent in January. That’s still marginally above the year-ago level, but the lowest reading since January of last year.

Another report found households in half the states struggling to afford the available for-sale inventory, based on their income. “Home prices have ascended far past wage growth in much of the country in recent years because not enough homeowners are selling and homebuilders have not boosted production enough to meet rising demand,” the NAR’s Yun said.

The new construction picture actually improved somewhat in January, with single-family starts running nearly six percent above the year-ago level. Single-family permits also beat the year-ago level, but only barely, and they fell below the December rate.

A Warning Sign?

Even less encouraging, builders reported that buyer traffic slowed in January, taking builder confidence levels down with it. The National Association of Home Builders/Wells Fargo Housing Market Index slipped from the high point it reached in December, registering declines both in perceptions of current sales and expectations for the next six months.

On the other hand, consumer confidence in the housing market, measured by Fannie Mae’s monthly Home Purchase Sentiment Index, reached an all-time high in February, beating a plateau it had reached in January.

“The latest post-election surge in optimism puts the HPSI at its highest level since its starting point in 2011,” Doug Duncan, Fannie’s chief economist, said in a press statement. Millennials, he noted, reported “especially strong increases in job confidence and income gains, a necessary precursor for increased housing demand from first-time homebuyers.” Reflecting those rising confidence levels, Fannie analysts have found preliminary indications that millennials “are accelerating the rate at which they move out of their parents’ homes and form new households,” Duncan noted.

Millennials may finally be ready to purchase homes, but they are “encountering an unfortunate reality,” according to the Washington Post. “Just as they are finally ready to buy,” the Post noted, “the housing market has the fewest homes available for sale on record. And those that are for sale are increasingly priced at values inaccessible to first-time buyers.”

That supply-demand imbalance, by all accounts, is getting worse. Inventory levels – below 4 percent at the end of February ─ were 7.1 per cent lower than they were a year ago, continuing a year-over-year decline that has been reported consistently for the past 20 months. “One thing you can count on,” a Real Estate Watch analysis concluded: “If we have fewer homes to sell, chances are we’ll sell fewer homes.”