Jobs, Good Jobs, and Home Buying
Tech pioneer Kodak, headquartered in the upstate New York city of Rochester, employed 145,000 workers in 1988, to manufacture, distribute, and market its film and cameras. Today, there are more photographic images taken in a single hour than were shot in all of the 1800s, many of them on Instagram, owned by Facebook, which employs just under 18,000.
What this case is an example of is how technology may generate wealth and productivity in America in broad strokes on the one hand, but when it comes down to specific places and specific worker groups, they’re worse off than they were.
Now, a positive jobs report this past Friday–235,000 jobs created in February, and a lower unemployment rate of 4.7%— carries with it four key meaningful areas of interest for home builders and developers at present: household wage growth, consumer confidence, good job concentration, and interest rate increases. Let’s take a look at them, shall we?
Wage and income growth:
Calculated Risk blogger Bill McBride explains that household wage growth is trending upward, as evidenced in Friday’s jobs report. Here, McBride looks at earnings growth, employment to population ratio improvement, and declines in both part-time-for-economic-reasons and unemployed for more than 26 weeks groups. He notes:
This graph is based on “Average Hourly Earnings” from the Current Employment Statistics (CES) (aka “Establishment”) monthly employment report. Note: There are also two quarterly sources for earnings data: 1) “Hourly Compensation,” from the BLS’s Productivity and Costs; and 2) the Employment Cost Index which includes wage/salary and benefit compensation.
The graph shows the nominal year-over-year change in “Average Hourly Earnings” for all private employees. Nominal wage growth was at 2.8% YoY in February.
Improvement in both the jobs headline number, and in these four sub-narratives which have chronically been more stubborn during the dig-out from the Great Recession, starts to have an impact on another matter of great interest as regards home buyer demand: consumer sentiment.
Both the Conference Board and University of Michigan Survey of Consumers note year-on-year increases in their measures of consumer confidence, and the Conference Board index, which stands at 114.8, remains at a 15-year high. Gallup, too, notes in its Economic Confidence index, that Americans are more optimistic about both current conditions and outlook. Gallup analyst Andrew Dugan notes:
In February, one-third of U.S. adults (33%) described economic conditions as “excellent” or “good,” while 20% rated them as “poor.” This resulted in a current conditions score of +13 for the month — a three-point increase from January’s score and a nine-year high for this component.
What’s obscured in these national figures, however, is a wide variance in both the timing and trajectory of recovery by metro area, leaving entire regional swaths of the United States out of the good times going on in a few geographies.
Brookings Institution fellows Mark Muro and Sifan Liu look here at good job growth in the tech sector and observe that the data and trends do not suggest geographical dispersion from known tech hubs into “flyover” America. They write:
What is striking is not just that a whopping 46 percent of all U.S. digital services jobs cluster in just 10 of nation’s largest metropolitan areas, ranging from New York and Washington to San Francisco and San Jose to Boston, Seattle, and Atlanta.
Even more striking is the fact that only a handful of metropolitan areas have significantly increased their share of the nations’ digital services jobs since 2010. To be specific, just 5 metros out of the nation’s 100 largest metropolitan areas—San Francisco, San Jose, Austin, Dallas, and Phoenix—accounted for nearly 28 percent of the nation’s 2010 to 2015 tech growth. And only 14 managed to increase their share of the nation’s tech job base in a statistically meaningful way.
Tech, Muro and Liu conclude, is “divergent, not convergent.” A few prosper while the many languish, calling to mind “The New Geography of Jobs” author and University of California at Berkeley economist Enrico Moretti.
A handful of cities with the “right” industries and a solid base of human capital keep attracting good employers and offering high wages, while those at the other extreme, cities with the “wrong” industries and a limited human capital base, are stuck with dead-end jobs and low average wages. This divide — I will call it the Great Divergence — has its origins in the 1980s, when American cities started to be increasingly defined by their residents’ levels of education. Cities with many college-educated workers started attracting even more, and cities with a less educated workforce started losing ground.
Interest Rates Going Up
Irrespective of this lumpy “winners-take-all” economy, interest rates are headed for an increase this week, as the Federal Reserve meets and moves to tighten money supply ahead of an increasing surge of business and consumer confidence. New York Times economics correspondent Neil Irwin writes:
Fed officials seem to believe that the United States economy is nearing its full economic potential, that the expansion is more sturdy than it was just a year ago, and that inflation is closing in on the 2 percent mark that the Fed aims for. The advent of unified Republican control of Congress and the White House also brings the possibility of tax cuts and other stimulative measures that would mean the economy needs less support from low interest rates to keep growing.
Will higher rates kill the mojo builders are seeing in the market? Not so far, according to commentary from a piece in the latest Z Report, “New Home Buyers Barreling Through Higher Rates Thus Far,” from the Zelman & Associates team.
“Our new order price index accelerated 20 basis points to 6.1% in February, the best result of the last 12 months and ahead of the 5.5% average through 2016. With a 30-year fixed mortgage rate up approximately 50 basis points year over year, which is equivalent to a 5% price increase, and income growth of just 2-3%, affordability has deteriorated versus last year–but yet demand has actually strengthened.”
As we detail further below, consumer confidence and a still-favorable absolute level of affordability are the other most important pieces to the puzzle that have helped to bridge the gap. We remain modestly concerned that further upward pressure on long-term interest rates and/or any disruption in macro confidence could cause accelerating new home order growth to retrench, but at this point, the market is enjoying the favorable combination of limited inventory, strong household formation, improved confidence and accelerating entry-level demand.”
You can learn more about the The Z Report or sign-up for a free trial here.
The burning issue for home builders is that household growth, jobs growth, and income growth have all been on positive trajectories when you do the national math, but when it comes to doing the local arithmetic, it’s a decidedly different challenge. Some pent-up demand will be released, and a fair amount of it will remain pent-up because of how spotty and lumpy recovery has been and will continue to be.