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Deconstructing the State of the Housing Recovery 

Kristina Hooper 

The Upshot 

7/28/2014 

The rebound in the US housing market has slowed in the first half of 2014 for a number of reasons. But local economies and their respective job markets tell the real story. Kristina Hooper breaks it down.
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Kristina Hooper is the US investment strategist and head of US Capital Markets Research & Strategy for Allianz Global Investors. She has a B.A. from Wellesley College, a J.D. from Pace Law and an M.B.A. in finance from NYU, where she was a teaching fellow in macroeconomics.

Location, location, location. That’s the book on buying real estate. However, it also holds true for getting a read on the strength of the housing sector.

The pace of the US housing recovery has slowed, as labor-market conditions, credit availability and low levels of inventory have curtailed home-buying activity. But when evaluating the health of the housing market, it’s important to understand what’s happening in regional economies, not just the country as a whole.

First, let’s take a look at the national numbers released last week: June new home sales disappointed at 406,000 annualized versus expectations of 475,000. In addition, May new home sales were revised down to 442,000 from 504,000. All regions showed declines in June, but much of the drop can be attributed to the Southern region, which fell 9.5%. Similarly disappointing were new home prices, which slid 3.2%.

Southern Exposure chart

As for existing home sales, the results were better with sales rising a modest 2.6%. In addition, May existing-home sales were revised upward to 4.9%. There were differences by region in this report as well, with the greatest gains coming from the Midwest this month.

Also reported last week was the May FHFA House Price Index, which rose 0.4%, slightly better than expectations. There was specific weakness in the East South Central region—Kentucky, Tennessee, Mississippi and Alabama—and the East North Central region, which includes Michigan, Wisconsin, Illinois, Indiana and Ohio. Meanwhile, the West South Central (Oklahoma, Arkansas, Texas and Louisiana) and Mid-Atlantic regions (New York, New Jersey and Pennsylvania) saw gains.

The Link Between Housing and Jobs

Practically, it can be hard to make sense of this housing data, which is mixed but tilts more to the negative side. One takeaway is that there continues to be a slowdown in the housing recovery since mortgage rates rose last summer. Another key takeaway is that housing, like politics, is locally driven. For example, a look at unemployment rates shows an interesting correlation between employment and the housing market. In short, in areas where there is more slack in the labor market, housing data are decidedly more negative. But in areas where there is less slack in the labor market, housing data are much better.

In short, in areas where there is more slack in the labor market, housing data are decidedly more negative. But in areas where there is less slack in the labor market, housing data are much better.”
Essentially, viewing jobless rates by state shows that there’s a relatively high level of unemployment in the Southern region. While the overall unemployment rate for the United States stands at 6.1%, Georgia and Kentucky both have jobless rates of 7.4%. Alabama comes in at 6.8%, Tennessee is at 6.6% and Mississippi has a 7.9% unemployment rate. Some states have a below-average unemployment rate, such as Texas and Louisiana, which benefited from the energy boom.

This weakness in the South could help explain the disappointing new-home sales in the Southern region as well as home price weakness in the East South Central region, as reported by the FHFA House Price Index.

Jobless Rates All Over the Map

Unemployment varies widely by state, which reveals that
national averages obscure the fiscal realities of
local economies and that regional data matter.

Jobless Rates all over the map
Select to enlarge

Conversely, unusually low unemployment rates can be found in much of the Midwest, with North Dakota at 2.7%, South Dakota at 3.8%, Minnesota at 4.5%, Iowa at 4.4% and Kansas at 4.9%. This could be one important reason why existing home sales were so strong in the Midwest region. Notable exceptions to employment strength in the Midwest are Illinois, with an unemployment rate of 7.1%, and Michigan, with an unemployment rate of 7.5%. This could explain home-price weakness in the East North Central region.

Where’s the Wage Inflation?

Of course when you look at the bigger picture, the Fed isn’t just focused on the unemployment rate. Other metrics, such as wage growth, offer deeper insight into the state of the job market. We know from the last Fed Beige Book that both housing and employment are mixed. All districts reported "slight to moderate" employment growth. Interestingly, several districts again reported difficulty finding skilled labor. Meanwhile, wage pressures remained low in most districts except for some skilled positions where higher wages were needed to attract employees.

To be sure, the United States is a big country made up of a variety of different regions, each with its own dominant industries and varying economic environments—and therefore different unemployment rates. If home sales are at least partially a function of affordability, then employment must play a big role. That’s why digging into the regional housing data can be valuable when assessing the health of the housing market.

Following the Fed and jobs data are an important part of any housing market analysis. Indeed, the FOMC announcement on Wednesday and Friday’s employment report should provide more color on where housing will go from here. Ultimately, housing as a whole is only as strong as its individual parts.


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The material contains the current opinions of the author, which are subject to change without notice. Statements concerning financial market trends are based on current market conditions, which will fluctuate. References to specific securities and issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. Forecasts and estimates have certain inherent limitations, and are not intended to be relied upon as advice or interpreted as a recommendation.

 
Past performance of the markets is no guarantee of future results. This is not an offer or solicitation for the purchase or sale of any financial instrument. It is presented only to provide information on investment strategies and opportunities.


A Word About Risk
: Equities have tended to be volatile, involve risk to principal and, unlike bonds, do not offer a fixed rate of return. Foreign markets may be more volatile, less liquid, less transparent and subject to less oversight, and values may fluctuate with currency exchange rates; these risks may be greater in emerging markets.
 

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