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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Consumers are feeling better about the housing market, and the housing market appears to be feeling better about itself.

Fannie Mae’s Home Purchase Sentiment Index (HPSI) remained near an all-time high in December, propelled by a 16 percent year-over-year increase in the number of respondents declaring this a good time to buy a home.  Sellers are also upbeat.  “Good time to sell” responses increased by 7 points in this survey. 

“The continued strength in the HPSI attests to the intention of [consumers] to purchase homes,” Doug Duncan, Fannie Mae’s chief economist, said in a press statement. The index readings, he added, “support our predictions of a healthy housing market [this year], as well as consumers’ appetite and ability to absorb the expected increase in entry-level inventory.”

Although existing home sales in November fell slightly below the October pace, they beat the year-ago level by 2.7 percent, recording the fifth consecutive month of year-over-year gains, according to the National Association of Realtors (NAR). 

No Cause for Concern

The monthly decline is no cause for concern, Lawrence Yun, the NAR’s chief economist, said.  “Sales will be choppy when inventory levels are low,” he noted in a report, “but the economy is otherwise performing very well,” and the employment market remains strong.

Employers added 145,000 jobs in December, a bit below projections, but well above the 100,000 per month average economists say is required to keep pace with population growth. Wages grew more slowly  (2.9 percent vs. a 3.1 percent annual rate in November), but inflation remained subdued, keeping consumers’ purchasing power intact.

Pending home sales, an indicator of future home purchase activity, rebounded in November, increasing by 1.2 percent over an October reading that was almost 1.7 percent below the September level. The index is now up 7.4 percent year-over-year, confirming the view of many industry analysts that the housing market will continue to strengthen as we move into the spring homebuying season.    

A Very Good Year

New home sales increased to an annualized rate of 719,000 units in November, almost 18 percent higher than the year-ago pace. Housing starts and permits for new construction also reached 12-year highs in November, according to data reported by HUD and the U.S. Census Bureau.

“Even though some of the starch from prior months initial data has been washed out through downward revisions,” Matthew Speakman, chief economist for Zillow, observed, “2019 will go down as the best year for new home sales since before the Great Recession.”  

Those positive numbers pushed the National Association of Home Builders-Wells Fargo builder optimism index to its highest reading since 1999, reflecting “a growing sense that strong demand for new homes will persist,” Speakman suggested.  “Notable headwinds remain,” he acknowledged, but steady construction rates and new home sales volume should continue to boost the housing market.”

Other analysts caution that the headwinds – inventory shortages and affordability primary among them – are significant.  Inventory levels declined for the fifth consecutive month in November, according to Redfin, as the supply of homes available for sale fell more than 12 percent below the year-ago total. 

Affordability Pressures

With buyer demand outstripping supply, home prices are rising, increasing affordability pressures, especially at the entry level end of the market.  Prices rose at an annual pace of 3.7 percent in November, the largest annual increase since February of last year, according to CoreLogic

“”We are still building at a pace at least 200,000 below historical averages,” Robert Frick, chief economist at Navy Federal Credit Union, told Housing Wire, “and that relatively low supply and high and pent-up demand will keep  home prices rising and out of the reach of many first-time buyers. If we were building more homes under $300,000,” he added, “the [sales numbers] would be through the roof right now.”

Recent increases in home starts and permits suggest that housing market conditions are improving, Frick said, “and if builders move to building cheaper homes, in a few years we may return to a healthier housing market for both buyers and sellers.”

The operative phrase appears to be “in a few years,” however.   

“It will likely take several years, even at a more robust pace, for new construction to address the existing pent-up demand for additional housing [reflected by] a still increasing share of 25-34-year-olds living at home with their parents,” Fannie Mae analysts cautioned in their recent housing report.

CEO Concerns

Most analysts are predicting that a strong economy will continue to support homebuying demand this year, with some caveats. Although consumer confidence and consumer spending remain strong, corporate executives are skittish about the economic outlook.  A majority of the CEOs responding to a recent survey by Deloitte expect the economy to slow this year, and many see a recession as a significant and growing risk.

The labor market and the pace of economic growth would seem to support a more upbeat view, but the uncertain political climate and concerns about the ongoing trade war with China weigh heavily on the minds of many executives. 

“Business leaders are like normal people,” Bart van Ark, chief economist at the Conference Board, told  the Wall Street Journal.  “As long as we don’t have any guidance about where [things] are likely to go  next, it’s very had to make big investments. I don’t think the stress [executives are feeling] is going to go away.”  

Even if those economic jitters aren’t justified, they could nonetheless have an impact.  “One real risk of this recession mindset,” the Conference Board warns in a recent report, “is that it can become a self-fulfilling prophesy.”