The Federal Reserve announced last week, to no one’s surprise, that it would keep its cheap-money policy in place due to a lack of strength in economic data (particularly the labor market and consumer confidence). Although the unemployment rate dropped to 7.2 percent in September, this number is not low enough for the Fed to start tapering its asset purchases. Bernanke has stated he would want to see it at 7 percent before taking action. Central bank officials noted that the pace of housing recovery “has slowed” and they warned again that “fiscal policy is restraining economic growth.”
The labor market has a strong relationship with the housing market in terms of sales and supply. When people are unemployed or underemployed they are forced to seek cheaper housing, usually in the form of renting versus buying. The philosophy of “build it and they will come” can only be successful if people can afford to purchase the homes built. A lag in income growth compared to home price growth can also negatively affect this idea.
The Fed’s decision last week should help keep pressure off mortgage rates but this may not be enough to breathe life back into the housing market. The continued growth in home prices, in part due to inventory pressures, has helped homeowners experiencing negative equity move to a position of positive equity. This situation has decreased foreclosure rates but translates to increasing home prices for those looking to purchase in the midst of a still week labor market.
Mortgage applications for U.S. homes increased 6.4 percent from the prior week as the 30-year fixed mortgage rate dropped to 4.33 percent, the lowest rate since June of this year. Some economists question whether this trend will continue as the demand for single family rentals continues to strengthen and home sales weaken. Several buyers have been priced out of the housing market and many are still unemployed or underemployed.
“When you look at the employment rate, employment opportunity measures, you get a different picture of slack in the labor market,” Scott Anderson, the chief economist for San Francisco-based Bank of the West, commented. The average duration of unemployment has remained almost unchanged at 36.9 weeks (in September) over the last three years. The 6.9 million Americans working multiple jobs in September has remained steady when compared to the average of last year. What’s worse about the labor market, on average over the past 18 months, more Americans were working multiple jobs than during 2010 and 2011 averages.
It does not appear that the Fed’s actions have had the positive effect on the labor market as they had hoped. Many believe it has actually hindered growth, like the Central Bank stated above. Most can all agree; however, that the labor market needs to strengthen and economic growth needs to be present to help positively influence the housing market.
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