Unemployment Down: Home Prices Headed Up?

Friday's post on home prices brings to mind an additional factor we might analyze in predicting the market in the coming year. The November 2011 unemployment rate brings welcome news, especially with the holidays fast upon us: nationally, unemployment is down from 9% to 8.6%. But does this mean we should expect real estate to rebound accordingly?

We think the simply answer (if anything is simple about this economy) is: not immediately. But data exist that prove the relationship of employment and home prices, and these data offer us enough solid proof that we can be cautiously optimistic that things are poised to get better.

Which Comes First, The Chicken or the Egg?

When we think about home prices and employment, we can fall into that same Mobius Strip logic that defines the chicken-or-egg argument. Most ecomists posit that first, people lose their jobs, and second, home prices and sales decline as result. However, this isn’t the only way of looking at the relationship. Here is a chart from May of this year showing unemplyment rates in seven global ecomomies.

 

The Unconventional Economist argues that the “rate of unemployment (and non-performing loans)” often lags behind home prices instead of leading them. “This is because when levels of debt and asset values are rising, households feel richer (the ‘wealth effect’), spurring consumer confidence, spending and employment growth. However, once asset prices stop rising (or fall in value), the process of debt feeding asset prices feeding confidence and consumer spending can shift into reverse, causing rising unemployment.”

 

His study is on Australia, and whether this country, with its relatively low unemployment, is bullet proof in terms of real estate value. But to complete this study, he looked at both the UK and the US since both countries have dealt with housing bubbles; so we can draw implications for our own country’s market from his data.

United States:

Home prices in the USA peaked in June 2006 and then began falling gradually. However, unemployment continued falling, reaching a low of around 4.5% in March 2007 – 9 months after home prices peaked.

VERDICT: DECLINING HOME PRICES LED RISING UNEMPLOYMENT

United Kingdom:

Home prices in the UK peaked in September 2007 and then began falling gradually. However, unemployment continued falling, cratering in March 2008 at 5.2% – 6 months after home values peaked.

VERDICT: DECLINING HOME PRICES LED RISING UNEMPLOYMENT

How a Decline in Home Sales Spurs a Decline in Employment

Part of American unemployment, of course, comes directly from real estate downturns: Since the US employees (or in the past, employed) a great number of people-- whether as Realtors, construction workers, or those in sales/services associated with real estate--we should not be surprised to see the big decline in housing came first, and the unemployment rate then continued to shoot up. In May of 2010, the Center for American Progress wrote that “2.1 million construction workers are out of a job. Jobs are down 38 percent since 2006 in residential construction alone.”

It’s interesting to see how closely ties employment and real estate really are: the issue is much more than simply “if people can’t get jobs, they can’t afford houses.” We also have the to consider the huge percentage of Americans who work in the business of making, improving, selling and buying homes, because all of these people depend on a healthy real estate market for healthy incomes. In their case then, the housing situation leads the job situation.

Unemployment is Down. Will This Affect Home Prices?

Whether or not home prices and sales lead unemployment or unemployment leads home prices and sales (we suspect it’s both: back to the Mobius Strip we go!), the missing part of the equation is consumer confidence. David Blitzer, Chairman of the Index Committee for the S&P Indices writes:

 “The question for housing is wrapped up with how confident people feel. If the only factors affecting the decision to buy a house were mortgage rates and home prices, we would be looking at a housing boom.  Prices are down to the levels seen in 2002-2003 and mortgage rates are lower than any time in the last 40 or more years.  Still, people are not rushing to buy.  A big missing factor is confidence — confidence about the economy, about jobs, about being able to make mortgage payments and about the future.  That’s where the economy and the unemployment rate make a big difference.”

So, the problem with popping the champagne at this point is that this is the first month of good news we’ve gotten about employment in the US—after a long string of dismal, scary news, one blip of optimism won’t be enough to convince those people who’ve been frightened off to” rush out and buy a new home.” Blitzer agrees:  “For both housing and jobs, we need a string of good reports, not just one little pop.”

However, optimism starts somewhere: it starts with the first glimmer of hopeful news we see. And a decline in unemployment certainly glimmers.