Capital

For Market-Rate Housing, A Week That Will Help Clarify What's Next

Clarity, like it or not, will most likely begin with this week's and early November's series of employment data releases.

Capital

For Market-Rate Housing, A Week That Will Help Clarify What's Next

Clarity, like it or not, will most likely begin with this week's and early November's series of employment data releases.

October 3rd, 2022
For Market-Rate Housing, A Week That Will Help Clarify What's Next
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An atypical "jobs" week, or rather, a moment-of-truth jobs week is underway, with Friday as a fourth quarter 2022 lightning rod.

The raft of first-week-of-the-month employment benchmarks coming both from government data agencies and private sector payroll companies may look the same as ever.

It's their freight that's different. Welcome to housing's Great Disambiguation, a several month inflection period likely to prove yay or nay, essential characteristics such as "soft" or "hard" or local or national, for the housing economy's landing, after energized debate and disagreement.

As bedrock signals of the health of the economy, the private and public payroll employment situation, wages information, labor participation, job openings, terminations, discretionary quits, and unemployment rates data points unavoidably carry a good-news-bad-news message for residential real estate development and construction.

Numbers that reflect employment and wage growth dynamics that continue to barrel along – under normal circumstances a strong positive for market-rate for-sale and rental housing demand – will flash an instantaneous warning that the Federal Reserve still hasn't begun to wrest inflationary pressures out of the system. This will redouble expectations of further Fed aggressiveness in its bid to root out inflation causes at their source.

So strong jobs, low unemployment, tight labor markets, and pressure on wages is a negative. On the other hand, if jobs, wages, and unemployment data suddenly reveal signs of slack, and it looks as if the broad economy could weaken further, leading to jobs destruction, it may satisfy the Fed's goal of widespread capitulation, but it could also lead to a point of no-return loss of economic strength.

In that case, an equities correction could deteriorate into a deflationary jag whose impact on jobs and household income could spread into some of the dual income households currently propping up spending, confidence, and what remains of momentum and strength in housing demand.

For most of those whose livelihoods derive from the related businesses of housing, it's likely felt like the Fed's sole target is them. Close, but not quite. Housing's one of the crude but quick tools to get not only at commodities inflation, but wages.

The jobs market – with the exception of the seismic shock at the outset of the coronavirus pandemic and its near-term aftermath – is the single remaining juggernaut coming out of the Great Financial Crash in 2010, and running more than 112 months consecutively without missing a beat on jobs growth, adding more than 21 million to U.S. payrolls prior to Covid. What's more, the economy in the past two years added back a payroll employee for every lost job due to the Covid shock, and then some this summer.

The resilience and impact of consumer spending has been a bright spot in an increasingly bleak context.

One known here is that the Fed has housing in its cross-hairs as a kind of economic acupuncture, recognizing that it's the fastest and most scalable route to spread disinflation into the economy, given residential investment's multiplier-effect impact on a broad number of sectors and geographies.

Another known is that what goes up very far and fast has a good deal of room to come down before it starts spilling blood in the streets.

The unknowns are too many to name, yet where and when "normalization" occurs is one of them. When what's going on is an intervention of an intervention of an intervention, etc. in economic, monetary, and fiscal policy, the consequences – intended and unintended – are models, not reality. A CNBC report notes:

So, what is a big worry for clients in this economic environment? “What the labor environment is going to look like and what their risk is as far as unemployment goes,” said certified financial planner Douglas Boneparth, president of Bone Fide Wealth in New York, whose clients are largely between ages 28 and 42.
“At this point it’s speculation,” Boneparth said. “It’s hard to point to data that says we need to be concerned right now.”

After this week, and particularly after Friday's employment report from the Census Bureau, there will begin an opportunity to grasp more and speculate less. As is the issue with all macro data series, a single report – whether or not it points dramatically one way or another – does not a trend make.

Among the issues that builders operating in hundreds of markets and thousands of submarkets are trying to sort through include:

  • Elasticity: interest rate tolerance levels  
  • Comparables: seasonality vs. conditions-driven sales and traffic trends
  • Pattern recognition: the "downturn proof" buyer, product, and place
  • Optionality: trade-offs around inventory releases to build-to-rent investors
  • Reset button: the new value-engineered entry-level inventory turner

For many privately-held builders, the challenges amount to a house by house, customer by customer, week-by-week series of decisions, actions, and resolutions. Pace – a given six months ago – may have shifted to all-push in some neighborhoods, while others continue to show some mojo.

What remains surprising is the extent to which most homebuilding and residential real estate businesses believe – not without reason, experience, and evidence – that the dynamics supporting a constructive near- and mid-term outlook operate in isolation, not only from Wall Street financial volatility, but seemingly, from stresses and shocks to global energy and food supply as well as ongoing disruptions in the tech and financial services sectors.

Emily Peck, Axios Markets correspondent concludes in a piece, "The housing market is stuck," with this thought:

What to watch: The job market. Unemployment can unstick a lot of things for reluctant home sellers.

Meaning, stay tuned for Friday's employment report for signs about whether dominos have started tumbling or will begin to fall that signal "normal" may have a ways to go – past 2019 or 2018 levels – before price, pace, product, location, etc. find equilibrium.

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ABOUT THE AUTHOR

John McManus

John McManus

President and Founder

John McManus, founder and president of The Builder’s Daily, is an award-winning editorial, programming, and digital content strategist. TBD's purpose is a community capable of constant improvement.

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President and Founder

John McManus, founder and president of The Builder’s Daily, is an award-winning editorial, programming, and digital content strategist. TBD's purpose is a community capable of constant improvement.

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