- The U.S. housing market's quiet tailwind
The U.S. housing market's quiet tailwind
This persistent strength in the U.S. labor market has also acted as a tailwind for the housing sector.
Today’s letter is brought to you by Arrived!
Arrived makes it easy to buy shares of rental homes, allowing anyone to earn passive income and benefit from property value appreciation. Simply select from our wide selection of high-quality rental homes and invest anywhere between $100 and $20,000 in each property.
Arrived takes care of the management & operations, so you can sit back and build wealth. Arrived is backed by world class investors including Jeff Bezos & Marc Benioff.
In 2022, Federal Reserve Chair Jerome Powell raised concerns about the overheated U.S. housing market and the U.S. labor market, emphasizing that both needed to be reined in.
Fast forward to 2023, and the national housing market has stopped overheating. Over the past 14 months, from June 2022 to August 2023, U.S. home prices rose by +1.4%, a significant deceleration compared to the historic +23.4% gain in the preceding 14-month window (April 2021 to June 2022).
However, the labor market, on a national level, has remained hot. Despite Powell's acknowledgment of the need for softening in the labor market, the unemployment rate in October stood at 3.9%, only slightly below the 3.6% rate observed in March 2022 when the Fed initiated interest rate hikes.
This persistent strength in the U.S. labor market has also acted as a tailwind for the housing sector. While the housing market has faced challenges, such as a significant increase in mortgage rates from 3% to over 7%, leading to affordability levels not seen since the early 1980s, the combination of a robust labor market and tight resale supply has mitigated the extent of the impact. This dynamic has arguably prevented a greater pullback in both housing prices and homebuilding activity. Keep in mind that tech hubs, which saw greater labor softening in the second half of 2022, were also the very places that gave up more on home prices.
To understand just how resilient the U.S. labor market has been, let's examine the historical data. The chart below illustrates the monthly unemployment rate dating back to 1970.
Dark red = red hot labor market
Dark blue = ice cold labor market
Why has the labor market remained so resilient despite the interest rate shock? Some economists argue that demographic shifts, particularly baby boomer retirements, have contributed to maintaining tight conditions in the job market. Others contend that homebuilders with robust balance sheets and profit margins, who have adeptly adjusted net effective prices (utilizing mortgage rate buydowns) and sustained new home sales, have shielded themselves from the layoffs that would typically accompany a rate-hiking cycle.
Looking ahead, the big question revolves around the potential softening of the labor market amidst the ongoing rate-hiking cycle. The unemployment rate has gradually inched up from 3.4% in January 2023 to 3.9% as of October 2023. In particular, economists are keeping a close eye on multi-family construction and regional banks.
Any thoughts on the piece? Email me at [email protected].