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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There’s an old rule-of-thumb for real estate investment: When the dentists and doctors finally get into the market, it’s time for everyone else to get out. A variation on that mostly (though not entirely) humorous observation applies to housing analysts: When they agree the market is healthy, it is almost certainly going to stumble, or fall.

If that theory is accurate, it may be time to brace for a setback, because there seems to be an emerging consensus that the housing market is stabilizing. Consider just a few examples from a rather long list:

“It has been an excruciatingly long time coming, but the housing sector in the United States is finally getting healthy.” ─ Housing Wire

“The Fannie Mae Home Purchase Sentiment Index reached a new high in July, with large gains in consumers’ expectations for lower rates and continued house price growth. The survey also showed a growing number of consumers leaning towards purchasing rather than renting if they were to relocate. There was also a notable and similarly positive shift in sentiment amongst younger households.” ― Mark Fleming, chief economist for First American Financial Corporation.

“Positives Pushing Housing Market Near Potential.” ― Headline in Daily Dose.

Mortgage originations are expected to top the $2 trillion mark this year. “This is a good sign for the housing market, as it continues to be an even brighter spot in the economy.” ― Freddie Mac Housing Outlook report.

Consumer confidence in the housing market has hit an all-time high. ─ Fannie Mae’s National Housing Survey for July.

Not a Unanimous View

These increasingly optimistic assessments of housing market conditions, while widely shared, don’t reflect a unanimous view; nor are they entirely supported by market data.

After increasing smartly for the previous four months, existing home sales seemed to hit something of a wall in July, declining below the year-ago level for only the second time in the past 21 months, as rising prices and shrinking inventories took huge bites out of resale activity.

“It is very difficult to sustain growing sales volumes when there simply aren’t many homes for sale,” Zillow Chief Economist Svenja Gudell, said in an interview with Real Estate Economy Watch. “What’s more,” she added, “the homes that are for sale are increasingly unaffordable for first-time and entry-level home buyers.”

“There’s a logjam,” Sam Khater, deputy chief economist at CoreLogic, agreed. “You’ve got first-time buyers who can’t buy, trade-up buyers who can’t move up, and it’s grinding to a halt,” he told the Wall Street Journal.

More Mixed Signals

But the housing market has been sending mixed signals throughout the recovery, and the signals remained mixed in July. While the resale market swooned, new home sales soared, jumping more than 12 percent to a nine-year high, as buyers, unable to find many options among existing homes, turned to new construction instead.

“Expect greater stability in the next few months,” Tian Liu, chief economist at Genworth Mortgage Insurance, predicted in an interview for The M Report. He sees “tremendous growth potential in new home sales as housing demand continues to grow [amid] the continued supply shortage of newer vintage homes.”

Residential construction activity also reached its highest level in five months, but (more mixed signals), building permits, an indicator of future housing starts, declined for the third consecutive month, suggesting that the homebuilding rebound so encouraging to many analysts may not hold.

The steady rise in home prices and the continuing decline in the homeownership rate resulting from it, also continue to unsettle some analysts. The ownership rate is now at its lowest level since 1965, and some analysts think that trend is more likely to worsen than improve over time.

Home Ownership Concerns

A recent RealtyTrac analysis found that home price increases were outstripping income gains in 61 percent of the markets analyzed, with no indication that this imbalance will be corrected any time soon. Another study predicts that the ownership rate, now at 62.9 percent, could sink to 58 percent or lower by 2050.

But on this point, too, analysts differ, with some seeing the ownership decline as a positive indicator, resulting not from a decline in the desirability of home ownership but from an increase in the number of young adults who have established renter households.

“The homeownership rate is so low because there are so many more renters – not because we have lost millions of homeowners,” Mark Fleming, the First American chief economist quoted earlier, notes in a recent commentary.

The renter population is growing, he says, because as millenials, “the biggest demographic group in American history” complete their education and find jobs, “they are naturally doing what so many generations before them have done – renting a place to live.”

Will they rent forever? “Doubtful,” Fleming says. These young adults may be delaying their move to ownership, but they haven’t abandoned the expectation that they will buy homes eventually.

The ownership rate may continue to decline for a while, Fleming agrees, “but make no mistake – once millennial renters decide to become homeowners it will be a housing boom of a different kind.”