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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Another strong employment report was the big economic news in November; what is happening in the housing market was the big question.

On the jobs front, employers added 214,000 workers to their payrolls in October, exceeding the 200,000 benchmark for the ninth consecutive month. Revisions to the September report added 31,000 to that month’s total, boosting average monthly gains for the past six months to 230,000. The unemployment rate fell to 5.8 percent, continuing an improving trend that has brought the rate down from 7.2 percent two years ago.

But the employment gains haven’t been matched on the income side; average wages grew by only 2 percent in October, barely beating the inflation rate and explaining why a falling unemployment rate hasn’t done much to lift consumers’ spirits.

A Wageless Recovery

“We are adding jobs, but it is still a wageless recovery,” Elise Gould, an economist with the Economic Policy Institute, told the New York Times “The economy may be growing,” she added, “but not enough for workers to feel the effects in their paychecks.”

Some analysts say wage gains are simply lagging the employment numbers and will surface soon; others aren’t convinced that the underlying trends support that upbeat assessment. For one thing, they note, of the new jobs added in October, only 40 percent paid more than the average U.S. wage ($24.57), down from 60 percent in September.

But there were also some encouraging numbers in the recent labor report, primary among them: 76.2 percent of young adults between the ages of 25 and 34 are now employed, the highest level since the end of 2008. That is potentially good news for housing, because this demographic group includes a sizable chunk of the first-time buyers, who have been largely missing in action during the housing recovery.

The September home sales figures were again mixed, as they have been for much of the year, and subject to differing interpretations. Existing home sales shook off their August funk, increasing to a 5.17 million annual rate. That beat the consensus forecast but remained below the year-ago level, which has pretty much been the pattern all year.

Pending Sales and Inventories

Pending sales, an indicator of future activity, increased by only 0.3 percent — a negligible gain, but enough to beat the year-over-year comparison for the first time in 11 months. Industry executives continue to cite tight credit as a major drag on sales, intensified by a shift in the buyer profile: Investors, whose purchases of foreclosed properties buoyed sales for the past two years, have largely abandoned the market as prices have increased and inventories of distressed properties have been depleted. But owner-occupants have not replaced them, with first-time buyers especially conspicuous by their absence.

Inventory levels declined again in September, falling to 5.3 months —below the 6- month supply representing a “balanced” market. Lawrence Yun, chief economist for the National Association of Realtors (NAR) says new construction is the cure – a lot of it. Builders, he says, have to increase production by 50 percent “and we think they will.”

Builders expect to ramp up their activity – but not as much as Yun would like to see. They’re expecting home starts to increase by around 25 percent, and most of that construction will likely continue to be focused at the high end of the market, where profit margins are greater and buyers have little trouble obtaining financing.

New home sales hit a six-year high in September, but given the anemic sales figures posted since 2008, that qualifies as damning with very faint praise. The 18 percent sales surge reported in August had stirred hopes that an erratic housing recovery was becoming sustainable, but the August figures were revised substantially downward, throwing buckets of cold water on those hopes.

The Trend Is Down

“The underlying trend is down,” Ian Shepherdson, an analyst at Pantheon Macro, told Business Insider. Despite periodic reports that sales are improving, he noted, “the details are less impressive than the headlines.” The reality is, new home sales haven’t exceeded 63 percent of what had been the national average since 2008.

“The [housing] story remains unchanged,” Lindsey Piegza, chief economist for Sterne Agee, agreed. The only clear message the statistics convey, he told Housing Wire, “is volatility.”

Home prices continue to slow from the torrid appreciation rates recorded last year. The 5.6 percent increase in the Standard & Poors/Case-Shiller 20-city index was the smallest gain since November 2012. But analysts differ on whether this is a positive indicator or an ominous one.

Stan Humphries, chief economist for Zillow.com, welcomes the downward trend. "We always knew these market conditions couldn't last, and it's good to see us now on a more natural and sustained glide path down toward more normal market conditions," he said in a press statement.

Analysts at RealtyTrac agree, at least partly, that price trends bode well for housing. Only 15 percent of properties with mortgages are seriously under water, which means more owners are in a position to sell their existing homes and purchase new ones. But that still leaves nearly 8 million homes with negative equity, and slower price gains will mean those owners “face a long road back to positive equity,” Daren Blomquist, a vice president at RealtyTrac, told Housing Wire.

Alex Villacorta, vice president at Clear Capital, finds the slowing price trend even more troubling. While the appreciation rate is still positive, he notes, the margin has been shrinking steadily. And he thinks it could turn negative. If so, he told CNBC.com, this would be the first time prices have declined nationally since the lowest point of the financial crisis. The particularly steep declines in the West represent something of a “canary in the coal mine,” he warns, because “in both the downturn and the recovery, we’ve seen that as the west goes, the rest of the country goes [eventually] as well.”

Mark Fleming, a CoreLogic economist, is closer to the mainstream view when he suggests (in the CNBC article), “There does not seem to be any particularly strong reason we should see sustained declines in house prices.”

But most economists don’t see much reason to expect the housing recovery to accelerate either. Sluggish income growth, limited inventories and tight credit will likely create the “choppy recovery” Fannie Mae economists predict in their 2015 forecast. If accurate, that means home sales will continue bouncing around their current levels well into next year. It also means, as the CNBC article noted, that the housing recovery “isn’t likely to be a driver of the economy any time soon.”