Job growth won’t stimulate many home sales in 2015
When the economy creates low-paying and part-time jobs, the newly employed don’t qualify for home mortgages, and they don’t buy homes.
The conventional wisdom is that increased job growth inevitably leads to increased household formation and increased home sales, and although the connection is real, increased home sales is not inevitable.
For home sales to increase, the newly employed must have sufficient income (and sufficient desire) to move out of their current circumstances and buy a house. For that to occur, the new job needs to be a good paying one capable of supporting a mortgage payment large enough to finance today’s house prices. Super low mortgage rates help, but it isn’t necessarily enough.
The lack of sales in 2014 cost most housing analysts by surprise, and most don’t fully understand why sales weren’t better: high prices, weak wage growth, and poor quality jobs are a recipe for low sales volumes.
Job growth will help housing this year. That’s the prevailing opinion of housing watchers, looking hopefully to the spring selling season. A stellar January jobs report only bolstered that belief. It may not, however, turn out that way.
Employment is increasing, no question, but not in the professions that typically own homes. Researchers at Freddie Mac looked at homeownership rates by profession and correlated them to the professions seeing the most and the least job growth.
“What we find is that many of America’s fastest growing careers (in terms of numbers of workers) have average or below average homeownership rates,” said Leonard Kiefer, deputy chief economist at Freddie Mac. “At the same time, the professions with higher homeownership rates are generally headed for average or subpar growth.”
I have talked about this many times over the last few years, but this is the first report with hard data released on this subject. Unless this trend changes, home ownership will remain in the low 60% range.
Most of the job openings projected by the Bureau of Labor Statistics over the next decade are in retail sales, food preparation and cashiers. Workers in these professions have homeownership rates below the national average.
“Over the long run, it’s not going to be supportive of a big pop in homeownership,” said Kiefer.
Forget about a boost in home ownership: over the long run, it won’t be supportive of the low 60s as an ownership percentage.
Meanwhile, professions with homeownership rates above the national average, like engineers, lawyers, doctors and computer and math professionals, are seeing only average job growth. Some with especially high homeownership rates, like business managers, have subpar growth rates. The glaring exception is nurses, who have both a high homeownership rate and high job growth rate.
This all may be why higher employment is not driving higher mortgage applications for home purchases. These applications fell for the fourth straight month last week, despite the average rate on the 30-year fixed still hovering below 4 percent, a historically low level.
The conventional wisdom is that purchase applications are down for a variety of reasons that don’t reflect underlying demand. Since sales are also down, the lack of demand explanation is more plausible.
Home builders may already be aware of this reality. While historically the best housing markets tend to be those with the lowest unemployment rates, those same markets are not seeing big jumps in housing starts. A study by Moody’s Analytics found that multifamily rental construction is passing prerecession peaks, while single-family continues to lag at about 40 percent of the previous peak.
“If low unemployment were sufficient to turn single-family [homebuying] around, then we should see those permits returning to historical levels in the top 20 percent of metro areas. Instead, we see that multifamily is doing even better, but single family is still struggling as in the rest of the U.S.,” wrote Adam Ozimek, an economist at Moody’s Analytics.
The logic of that statement is inescapable. We worked off the bubble-era inventory years ago, but new home construction still hovers near historic lows.
Younger Americans are getting jobs again, but they were hit the hardest during the recession and are now only halfway back to their prerecession employment rate. Adding to their homeownership headwinds, are sky-high rents, preventing them from saving enough to buy a home.
“The big thing is the timing. You get a good jobs report, but people are still behind, still catching up. The young age group are just getting jobs, they’re not ready yet. Even if you get the jobs moving, it’s going to be a while before it directly impacts home sales,” said Kiefer.
What lenders want more than anything is to replace their bad bubble-era loans with new stable loans with borrowers who can afford the payments on stable terms. They’ve already lowered mortgage rates to record lows to help this process along, but they are running into major problems with transaction volume and demand, and one of the major limiting factors is the lack of down payment money among potential homebuyers.
During the housing bubble, people had access to 100% financing, so few were saving for a down payment. After the housing bubble, the Great Recession caused many people to dip into savings just to make ends meet. Further, since the federal reserve lowered interest rates to zero, beyond the emotional need for reserves for stress reduction, people had little or no incentive to save.
The end result of these circumstances is that very few potential homebuyers have the necessary down payment, even the paltry 3.5% required by the FHA. And since renters are putting such a larger percentage of their income toward rent, even if they wanted to endure 0.2% savings interest rates, they don’t have the disposable income necessary to save for a down payment. No down payment, no sale.