The Bureau of Labor Statistics reported This Week in Real Estate that total employment increased by 528,000 in July, much better than expected in a sign of strength for the job market. The economy has now recouped the 22 million positions lost early in the pandemic and is 32,000 jobs higher than in February 2020. The unemployment rate is now back to its pre-pandemic level and tied for the lowest since 1969. Below are a few newsworthy events from the first week of August that influence our business:
This Isn’t a Housing Bubble. With all the headlines and buzz in the media, some consumers believe the market is in a housing bubble. It’s only natural for concerns to creep in that it could be a repeat of what took place in 2008. The good news is, there’s concrete data to show why this is nothing like the last time. There’s a shortage of homes on the market today, not a surplus. The supply of inventory needed to sustain a normal real estate market is approximately six months. Anything more than that is an overabundance and will causes prices to depreciate. Anything less than that is a shortage and will lead to continued price appreciation. For historical context, there were too many homes for sale during the housing crisis (many of which were short sales and foreclosures), and that caused prices to tumble. Today, supply is growing, but there’s still a shortage of inventory available. One of the reasons inventory is still low is because of sustained underbuilding. When you couple that with ongoing buyer demand as millennials age into their peak homebuying years, it continues to put upward pressure on home prices. That limited supply compared to buyer demand is why experts forecast home prices won’t fall this time. Mortgage standards were much more relaxed during the crash. Running up to 2006, banks were creating artificial demand by lowering lending standards and making it easy for just about anyone to qualify for a home loan or refinance their current home. Back then, lending institutions took on much greater risk in both the person and the mortgage products offered. That led to mass defaults, foreclosures, and falling prices. The foreclosure volume is nothing like it was during the crash. The most obvious difference is the number of homeowners that were facing foreclosure after the housing bubble burst. Foreclosure activity has been on the way down since the crash because buyers today are more qualified and less likely to default on their loans. In addition, homeowners today are equity rich, not tapped out. With the average home equity now standing at $207,000, homeowners are in a completely different position this time.
Job Gains Soar in July Amid Recession Fears. Job growth accelerated in July amid higher inflation and growing economic pressures. Construction industry employment (both residential and non-residential) totaled 7.7 million and has exceeded its February 2020 level. In July, residential construction gained 14,100 jobs, and non-residential construction added 18,300 jobs. Residential construction employment currently exceeds its level in February 2020. Total nonfarm payroll employment increased by 528,000 in July, following a gain of 398,000 in June, as reported in the Employment Situation Summary. It marks the largest gain since February 2022. In the first seven months of 2022, more than 3.3 million jobs were created, and monthly employment growth averaged 471,000 per month. As of July 2022, total nonfarm employment is back to pre-pandemic level in February 2020, meaning U.S. labor market is fully recovered from the COVID-19 pandemic. Meanwhile, the unemployment rate edged down to 3.5% in July from 3.6% in June, returning to the level in February 2020.
Yun: Possible Economic Downturn Likely to be Mild. The country isn’t officially in a recession yet, despite two consecutive quarters of national contraction of the gross domestic product, a commonly cited indicator of an economic downturn, says Lawrence Yun, chief economist for the National Association of REALTORS®. And several healthy economic trends, including a robust job market, coupled with new efforts to boost affordable housing could stave off a more serious slump, Yun adds. New guidance from the Treasury enabling state and local governments to use leftover emergency COVID-19 funding from the American Rescue Plan to create affordable housing should help ease the inventory crisis and counteract the effects of a tightening economy. Still, there are questions about whether the U.S. has entered “stagflation,” a period of high inflation combined with an economic slowdown, as many Americans feel the frustrating effects of a slower economy and higher consumer prices. But the National Bureau of Economic Research, the council that watches over U.S. business cycles, has yet to declare a recession, Yun notes. There are two major factors at work counteracting current economic conditions: Job creation is robust and commercial real estate is growing. “We are essentially at the same level of jobs and W-2 employment now compared to pre-COVID days,” he said. Data from the Bureau of Labor Statistics shows that right now, there are more job openings than unemployed people. As of June, there were 5.9 million workers searching for jobs and over 10 million job openings. So, while high unemployment typically characterizes a recession, “the ratio [today] is almost two to one,” Yun said. “It’s a very unusual recession – if we are in one.” Though a recession typically means bad news for commercial properties, the commercial market as a whole is flourishing despite a stagnant office sector, Yun writes. Rental demand is booming, and rents are up significantly. Demand for warehouse space has surged as retailers stock up to avoid supply chain disruptions. Hotel bookings, air travel and park attendance are now above pre-pandemic levels. All of this increased activity has led to high demand for new commercial construction. “The improving construction sector means that any recession will be mild,” Yun said. Despite the positive economic signs, falling homes sales remain a concern. “Home sales are down largely because mortgage rates have risen sharply,” Yun said at last week’s event. “If interest rates rise further, then home sales will decline even more—even if there is no recession.” One long-term solution is to increase housing supply, which is why the Treasury’s announcement is meaningful. The change in ARP guidance could mean significantly more funds going to housing supply and a reduction in costs for buyers over time. Another factor that will help in the short term is employers finding a way to match workers to openings and fill jobs, Yun said. “We still need workers. In an environment with rising mortgage rates, what will drive homes sales is jobs.”
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