The most recent job numbers may be disappointing in more ways than one: Payroll numbers will need to more than double their current growth rate before a full housing recovery can occur, economists say.
Recent weeks have seen some upbeat news about the housing market. According to data released this week by CoreLogic, for example, home prices increased 3.8% in July compared with a year prior — the biggest year-over-year increase since August 2006.
But a lagging workforce is likely to hold back the recovery in home sales. Today’s jobs report indicates that growth remains sluggish: U.S. nonfarm payrolls increased by 96,000 in August, according to seasonally adjusted data released by the Labor Department. Economists expected a gain of 125,000. While the unemployment rate fell to 8.1%, down from 8.3% in July, that was largely because some people stopped looking for work.
Beth Ann Bovino, deputy chief economist at Standard & Poor’s, says roughly 200,000 jobs have to be added per month through 2013 in order for the housing market to fully bounce back. And the unemployment rate will need to drop to at least 7%, she says: “[Current] numbers won’t push the recovery into full gear — we’re nowhere near that.”
In normal times, strong job growth leads to a strong housing market. The correlation is straightforward: The employed have income to save for a down payment and to qualify for a mortgage. By buying homes, they boost sales and help raise home values. A virtuous cycle can also kick in: Stronger demand for homes can create more construction jobs, helping lower the unemployment rate while creating more potential home buyers.
In some cities, real estate has recently improved as the unemployment rate has declined. In the Phoenix metro area, the unemployment rate hit 7.5% in July, according to the latest (not seasonally adjusted) data, compared with 8.7% a year prior and 9.6% two years prior. Recent home sales activity has been on the upswing: The median sales price of existing single-family homes in this area reached $148,400 during the second quarter of 2012, up 14.2% from the previous quarter and up 29% from a year prior, according to the National Association of Realtors. A pickup in sales has also increased housing starts by 52% (that’s when ground is broken to begin new construction) from last year, according to Metrostudy, a housing market research and consulting firm.
Some housing markets are currently deviating from previous norms, strengthening despite a weak labor market, says Brad Hunter, chief economist at Metrostudy. That’s largely due to investors who’ve been snatching up distressed properties at rock bottom prices and buyers with enough cash to buy homes outright. All-cash sales, which are popular among investors, accounted for 27% of existing-home sales transactions in July, slightly down from a year prior but substantially higher than the historical average of roughly 10%, according to the NAR. Home buyers who’ve remained employed through the recession have also jumped in to take advantage of low home prices and mortgage rates, Hunter says.
While this demand has boosted sales, that momentum could fall short if new buyers don’t enter the market soon. “To sustain the uptrend, we’re going to need jobs,” says Hunter. And even when job numbers eventually improve, experts say there will be a lag time until the newly employed start buying homes. Hunter says it could be a year until they have enough of a work history to qualify for a mortgage, or longer if they also need to improve their credit.