I took the pic after the 4th outside of Breckenridge, CO (has nothing to do with the article, but thought you would enjoy). Last week the US June jobs report was released that toppled all expectations. After a week May report the job numbers in June did not disappoint adding 224k new jobs while inflation was tepid. Why is the real estate market not performing as well as the jobs reports suggest? What does this mean for interest rates and the federal reserve’s next move?
What happened in the June jobs report?
The median estimate was for an addition of 160k jobs, the June report showed 224k jobs were created. The surprising part about the report is how broad based the increase in jobs were from healthcare to education to business services. The recent report on the surface looks great with every major sector adding jobs.
What does this mean for interest rates?
Before the jobs report, the market was anticipating a half a point cut to a quarter point cut. Now the discussion has changed to no cut in July to possibly a quarter point cut. Interest rates traditionally track the 10-year treasury. As expectations about the federal reserve and general economic conditions change, the 10-year treasury will move. In this case after the jobs report, bond prices dropped, and yields increased which means mortgage rates also increased slightly due to the changing expectations.
The jobs report puts the federal reserve in a tough position. The market is anticipating a quarter point cut, but the numbers appear to point to no cut at all. We will have to wait and see how the federal reserves handles this tricky situation to reset expectations.
The jobs report is not all rosy
When you dig into the numbers of the jobs report two notable items jump out:
- Government hiring: A big portion of the recent jobs increase is coming as a result of local and federal hiring. As the economy has improved, so have property values and therefore revenue has increased substantially for local governments (In some cases where states have no property tax, income tax and sales taxes have also increased dramatically). With local governments flush with cash they have gone on a hiring spree. Unfortunately, just as quickly as revenue increases it can be gone and so will hiring in this sector. Public sector hiring will be the first to go when the economy turns and is not sustainable for long term economic health.
- Wages are not increasing meaningfully: With basically full employment as we are now, one would expect that wages would begin to rise much quicker than they have. In any basic economic model, as supply decreases and demand stays constant prices rise. Why is this not happening for wages? I suspect that there are more workers on the sidelines or other alternatives keeping a lid on wage increases. Without meaningful wage growth, it is impossible for the economic expansion to continue much longer. This is a worrying trend that is not being captured in the current jobs number.
Why is real estate slowing while economy still humming along?
Real estate sales are one of the largest “durable good” purchase. As the economy slows or expectations about the economy changes consumers and business pull back from large purchases. We are seeing this today especially on the consumer side as almost every major US real estate market has slowed or is falling slightly. The slowing/declining real estate market provides further fuel that the jobs report is not as rosy as the headline. Consumers and businesses for whatever reason are becoming more pessimistic on the longevity of the current economic expansion. This pessimism is flowing through the real estate market with prices staying flat/declining and inventory increasing in many markets.
Summary
Although the jobs report looks great on paper, the real estate market is telling a radically different story of the economy’s health. The jobs report is backwards looking while the real estate market is a forward-looking indicator of future perceptions on the economy. Based on the current state of real estate, consumers and businesses are flashing a warning sign that the economy is not as healthy as the jobs report suggests.
Additional Reading/Resources
I need your help!
Don’t worry, I’m not asking you to wire money to your long-lost cousin that is going to give you a million dollars if you just send them your bank account! I do need your help though, please like and share our articles on linkedin, twitter, facebook, and other social media. I would greatly appreciate it.
Written by Glen Weinberg, COO/ VP Fairview Commercial Lending. Glen has been published as an expert in hard money lending, real estate valuation, financing, and various other real estate topics in the Colorado Real Estate Journal, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.
Fairview is a hard money lender specializing in private money loans / non-bank real estate loans in Georgia, Colorado, Illinois, and Florida. They are recognized in the industry as the leader in hard money lending with no upfront fees or any other games. Learn more about Hard Money Lending through our free Hard Money Guide. To get started on a loan all they need is their simple one page application (no upfront fees or other games).