Faster Job Growth Is Needed For Home Sales To Improve

Investor's Business Daily

While economists are encouraged by recent job growth in the U.S., they say the impact on home sales won't be meaningful until jobs get created at a faster pace and newly employed young people have more time to build up savings.

On the plus side, employment has been growing while the unemployment rate has declined. This should help prop up the recovering housing market. Albeit December job gains came in light of expectations.

"More people working means additional housing demand," said Lawrence Yun, chief economist at the National Association of Realtors. "In last 12 months the private sector has added 2.2 million jobs. That's 2.2 million potential homebuyers.

But while the U.S. job market is "clearly recovering," he says, it is not yet growing robustly enough to move home sales into higher gear.

This month the Labor Department said employers added only 74,000 jobs in December — well below the 197,000 economists expected. The unemployment rate fell to 6.7% from 7% in November. An average of 182,000 jobs were added each month in 2013, below 2012's monthly average of 183,000 jobs.

On Thursday, the Labor Department said jobless claims rose by 1,000 last week to a seasonally adjusted 326,000. The four-week average fell for a third week to 331,500.

"We are almost back to the prior peak before the Great Recession in terms of jobs, but this has taken almost five years," Yun said. "In the interim we have fresh high school and college grads coming out who need jobs.

Home Sales Slide In Low

On Thursday, the NAR reported that December existing-home sales rose only 1% to a seasonally adjusted annual rate of 4.87 million. That followed a downwardly revised rate of 4.82 million for November. However, sales for all of 2013 climbed 9% to 5.09 million, the strongest showing since 2006.

The NAR had been looking for a 10% boost to nearly 5.13 million for 2013, in its forecast from November, when it looked ahead at 2014 to deliver a slight drop to 5.12 million.

The median existing-home price, the group also forecast, would lift 11% for 2013 to about $197,000 and rise 6% in 2014. In Thursday's data, the median price for 2013 came in on target, at $197,100, showing the best percentage gain since 2005.

In another report Thursday, the Federal Housing Finance Agency said U.S. house prices rose 0.1% in November, the smallest monthly gain in over a year. It fell short of the 0.4% expected by economists.

The numbers should improve if the pace of job gains picks up.

"Job growth has been steady but slow. An unusually high number of people have been unemployed for a long time, making it harder for them to get back into the job market," said Jed Kolko, chief economist and vice president of analytics at homes website Trulia (TRLA).

Many of those people fall into the 25- to 34-year-old age group, he says. That's a key demographic because younger folks make up a big potential market of homebuyers.

According to data provided by Kolko, employment among 25- to 34-year-olds rose to 75.4% in December after dipping below 75% earlier in the year. Still, that December employment rate of 75.4% was closer to the low point of the recession (73% to 74%) than to the prebubble normal (78% to 80%), he says.

Until more of these people get jobs — and until those who do have jobs have more money to save for a house — they aren't likely to move the needle much on U.S. home sales.

"After the severe recession many young people lived with their parents," Kolko said. "Their first step after getting a job is to rent instead of buy. It takes years to save for a down payment. You don't get a job one day and buy a house the next.

The overall job market — not just for young adults — also has far to go to have a major impact on housing.

The NAR's Yun points out that before the recession hit, about 63% of the nation's total adult population was working. When the recession hit, that figure dropped to 58%.

"Today, it's still about 58% because you have so many young people moving into the job market," Yun said. "The job creation pace needs to be much stronger in order to get the employment rate to rise.

Impact In Perspective

The housing boom that preceded the recession was a time of "full employment," he says. That contributed to a rapid rise in sales, but wasn't the only factor. Falling interest rates and easy credit also played a part.

Even if the U.S. gets back to full employment, you're not apt to see the same kind of overheated housing market this time. That's because interest rates are rising instead of falling, and lenders have significantly tightened their standards.

Also, many Americans remain gun shy about pulling the trigger on home purchases, says David Urani, an analyst who follows homebuilders for Wall Street Strategies.

"Builders are waiting for first-time buyers to come back to the market," he said. "Everyday Americans need to get a little more confidence to get back to where they were before the downturn.

The types of jobs people get also impacts housing. Yun says there is a larger-than-usual share of part-time and temporary employment in recent job-growth numbers.

However, "when you look at total income creation, it looks like these are average salary jobs, so that's a positive sign," Yun said.

Parts of the country where housing is more affordable — mainly the Midwest and South — should see a more immediate impact on home sales because people don't need to earn as much money to buy a home.

Meanwhile, many of the markets hardest-hit in the housing bust have seen strong job growth over the past year, which has helped their home sales recover. Kolko cites Phoenix and Las Vegas as well as Florida markets such as Tampa, Orlando and Ft. Lauderdale.

Also, a number of large markets are enjoying a "construction boom" tied to strong job growth, Kolko says, including San Francisco, Houston, Boston and San Jose, Calif. Many of these markets have pent-up demand due to low inventories of new homes.

"They avoided the worst of the housing bust and are now seeing strong job growth and construction above normal levels," he said.

The weak December jobs report initially had a positive impact on homebuilder stocks. The reason: The report likely delayed plans by the Federal Reserve to slow its asset buying program and let interest rates rise on stronger jobs numbers.

Big builders including Pulte Group (PHM), Lennar (LEN), Toll Bros. (TOL) and D.R. Horton (DHI) all rallied on Jan. 10, the day the December jobs report was released, though they have since settled back some.

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