Recent Strength In Housing Will Reverse Unless Employment Improves

Includes: XHB
by: Vahan Janjigian, CFA

The collapse of the housing market, which began in 2006, helped push the U.S. into what is now called the Great Recession. The Great Recession, which officially began in December 2007 and ended in June 2009, is the longest recession since the Great Depression, which started in 1929. Although the Great Recession is technically over, for the millions of people who are still out of work, it feels like it's still going on.

However, recent strength in the housing market is giving some economists hope that better times lie ahead. New and existing home sales have picked up significantly and prices have firmed. More importantly, inventories are way down, suggesting that housing prices will continue to strengthen. Just 2.5 years ago, sales were so weak that it would have taken almost a full year to clear the market of homes available for sale. But at today's sales pace, the inventory of existing homes for sale would clear in just 4.5 months. Conditions in some parts of the country have improved so much that realtors are once again starting to talk in terms of a sellers' market. Indeed, in some markets, buyers are bidding above asking prices.

Some economists are even warning about the start of another housing bubble. I seriously doubt that is the case. After all, housing goes hand in hand with employment. The unemployed don't typically place bids on houses; and neither do those who are still working but are somewhat insecure about their future prospects.

There is some evidence that employment is improving, but the evidence is still tenuous. Yes, the official (i.e., U-3) unemployment rate is down significantly from its peak of 10% in October 2009. It is also true that weekly jobless claims are almost half of what they were in March 2009. That certainly is good news. Unfortunately, the still weak state of the employment market becomes clear when one examines the civilian labor force participation rate. This all-important measure states the percentage of the civilian labor force (i.e., those who are least 16 years old and not institutionalized) that is either employed or looking for work. The current figure is just 63.6%. Other than the 63.5% reading in August, you would have to go all the way back to 1981 to find it at a lower level.

Of course, demographics explain some of the decline in the participation rate. After all, the population is aging and there are a lot more retired people today than there were in the 1980s. Yet that does not tell the whole story. A large portion of the decline in the participation rate is simply due to the large numbers of individuals who are so discouraged about finding work that they have simply stopped looking.

With the pending sequester (automatic spending cuts) axe about to drop, the jobs market could get considerably worse, at least in the short run. Defense contractors, in particular, could soon begin laying off large numbers of employees. Frankly, it is difficult to believe that the recent gains in the housing market will continue unless the jobs market gets much stronger. We will get a batch of new data on the housing market on Tuesday morning, including the latest S&P/Case-Shiller figures on existing home prices. Robert Shiller, after whom the widely-followed index is named, conducted a survey of recent home buyers. He said the results failed to uncover "any evidence of increased optimism among the people who are actually buying houses." Shiller wrote in the New York Times that despite improvements "the tea leaves don't clearly suggest any particular path for [housing] prices." If the man who called the top of the stock market in 2000 and the top of the housing market in 2006 is not yet willing to bet that housing prices have bottomed then perhaps neither should the rest of us.