Only about 98,000 non-farm payroll jobs were added to the U.S. economy in March, according to the U.S. Bureau of Labor Statistics – far short of the 180,000 predicted by most economists.
Still, the unemployment rate dropped to a 10-year low of 4.5%.
Ecnomists say a return of winter weather – including a snow storm that hit the Northeast in mid-March – played a role in the disappointing numbers, as this reduced the number of construction-related jobs that normally would have been added. What’s more, sharp job losses in the retail sector – due mainly to the shuttering of hundreds of brick-and-mortar retail locations – contributed to the lackluster growth, as retailers continue to struggle with finding the proper balance between brick-and-mortar and online sales.
A big question for the housing and mortgage markets, of course, is whether this disappointing jobs report will have any impact on consumer sentiment and spring home sales. When consumers think there are fewer job opportunities, it tends to diminish their expectations for the future.
An even bigger question is whether this report – and the next one to be released in May – will impact the Fed’s decision to raise rates, come June.
Doug Duncan, chief economist for Fannie Mae, says the disappointing figures for March “probably will not be enough to shake up the Fed” with regard to its decision on whether to raise rates.
However, should the next report show that the economy again only added about 80,000 jobs, or less, “then I think that might delay the Fed [in making its decision],” Duncan tells MortgageOrb.
“I don’t see them taking the next hike off the table, based on this report – we think they will make a move probably in June,” Duncan says. “But last year, they said they were going to raise four times and ended up raising only once. So, I think it really depends on what the data looks like before they have their next meeting.”
Duncan says this report probably will not have much of an impact on consumer sentiment, either.
“I think more important than the number of payroll jobs that are reported is what’s happening to home prices, interest rates and income growth,” he says. “Those are the things that consumers seem to be most concerned about right now.”
Still, consumer sentiment toward housing was not as favorable in March as it was in February. Fannie Mae’s Home Purchase Sentiment Index decreased 3.8 percentage points in March to reach a score of 84.5, following February’s survey high.
The net share of Americans who reported that now is a good time to buy fell 10 percentage points, while the net share reporting that now is a good time to sell increased nine percentage points, according to the survey.
That’s partly a function of mortgage interest rates, which increased in March before edging back down again in April.
“Interest rates are down a little bit from the peak – and here, we usually talk about the 10-year Treasury because that’s the base pricing for mortgages,” Duncan explains. “[The 10-year] got up to a little over 2.6 percent and is now down around a little under 2.4 percent. That’s still significantly higher than it was in the middle of last year – it was about 1.6 percent in July 2016. So, we’re still up 80 basis points or so. So, it’s a little bit less affordable, on the mortgage side, than it was – and people are coming to terms with the fact that those rates are not going to sink back as far as where they were at the middle of last year.”
This concern over rising rates, Duncan says, bled into Fannie’s survey results for March.
“It’s also become obvious to people that, for first-time home buyers, the pace of price appreciation is a challenge,” he adds. “So, that’s why the share of people who say in our survey that now is a good time to sell a house is actually greater than the share that says it’s a good time to buy. So, you can see the impact of pricing on the demand side and the supply side – it is impacting the attitudes of people who are on either side of the divide.”
A lack of inventory continues to push up home prices, which, in turn, is affecting affordability and is shutting first-time home buyers out of the market.
“The most important thing that could happen today, from my perspective, would be a strong surge of home building to moderate the pace of price increases,” Duncan says. “Because, while the price increases are comforting for people that already own a house because it suggests more equity wealth, for the people [who] would like to buy a house, they’re on the other side of that coin.”
Moving forward, Duncan says Fannie Mae is forecasting that “interest rates are probably going to stay pretty close to where they are – with the probability of them declining just as good as them increasing.”
“It partly depends on whether policy change happens – and when it happens,” he says. “Home prices are appreciating at about four times the long-term adjusted rate of inflation; so, that is an affordability problem for first-time buyers.
“So, the real question is what can happen on the supply side of the equation,” he continues. “We think there will be some improvement over this year – we now have strong evidence that the millennials are moving into buying houses right now. And that’s something that we expected, as they got jobs and increased income.”
According to Fannie Mae’s consumer survey for March, Americans expressed reduced confidence about the stability of their jobs, with the net share of that component falling eight percentage points.
Additionally, on net, the share of respondents reporting that their household income was significantly higher than it was 12 months prior decreased eight percentage points.
Duncan agrees that, in addition to building smaller, more affordable homes – which builders are just now starting to bring online – wage growth is going to have to increase significantly in order for the housing market to pick up steam.
“In our [March] survey, the question we ask, ‘Is your income higher than it was 12 months ago?’ got a negative response. So, there’s no question that the slow pace of income growth is on the minds of consumers, particularly ones that would be amenable to buying a house,” he says. “And that’s always the issue – if interest rates rise faster than income, then you see some slowing in home sales because people can’t keep up.”
Currently, Fannie Mae is forecasting home prices will increase 5.5%, nationally, in 2017.
“But that is certainly differentiating regionally,” Duncan says. “For example, the pace of increase has actually been slowing in San Francisco, particularly in the Bay Area, and it’s partly because there is simply no supply there right now, and entry-level people can’t afford what is available. So, the level of sales activity is slowing down – simply because there’s just no supply.”
Duncan says although there’s no indication, as of yet, that uncertainty over policies coming out of Washington, D.C., is affecting consumer sentiment, it could start to happen soon.
“No question there was a big surge in consumer optimism post election – but some of that has since come off,” he says. “When we released our forecast in January, we said our theme was, ‘Will Policy Extend The Expansion?’ We want to point out that this is now the third-longest expansion on record. And the fact that there’s likely to be policy change – the question becomes, would it be beneficial to make helping the economy continue to grow or grow faster?
“But there’s two caveats here: One is that it depends on the nature, magnitude and sequencing of policy change, and the second one is, just because there’s an ‘R’ in the White House, an ‘R’ in the House and an ‘R’ in the Senate does not mean they are from the same alphabet. So, we feel like we got that part of the year’s forecast completely correct.
“So, the decline in the level of consumer optimism, from our perspective, has simply been that the public is realizing that no matter who is in Congress or the White House, it is always difficult to get legislation through,” he adds. “And people are kind of coming to terms with that – they’re saying, ‘Okay, well, this might not happen as fast as we had thought,’ and so the level of optimism is cooling a bit.”
Some economists, however, took a different view of the jobs report. Brett Ewing, chief market strategist of First Franklin Financial, for example, says, “For traders, if they were discouraged by the hawkish release of the Fed minutes [last] week, then this jobs report and tomahawk missiles flying through the air should be a sight for sore eyes.
“The Fed will have almost no legs to stand on for raising rates in the face of such uncertainty abroad and economically at home,” Ewing says in a statement. “It is no wonder that the market is holding up so well in the face of this ‘bad’ news.”
Ewing says beside the bad weather and the loss of retail jobs in March, “the most negative thing about the report was a deceleration in average hourly earnings.”
“While they are still growing at a solid pace, we never want to see that growth start to decelerate, and it is something we are focusing on for upcoming months,” Ewing says. “On a transposing, positive note, the employment-to-population ratio hit a post-recession high and is accelerating.”
Mark Fleming, chief economist for First American Financial Corp., however, was mostly optimistic about the report.
“[The] jobs report for March is continued good news for the economy,” Fleming says in a statement. “While the increase of 98,000 non-farm payroll jobs is significantly lower than the recent trend, it is important to note that we have had consistent year-over-year expansion of the labor force for six-and-a-half years now. The total number of non-farm payroll employees is more than 10 percent higher than at the end of the recession and six percent higher than before the recession. The even better news is the drop in the unemployment rate to 4.5 percent, a level not seen since May 2007, almost a decade ago.”
Still, growth in construction employment, which needs to expand to increase the pace of housing starts, was a disappointment, with only 6,000 new jobs reported, Fleming says.
“The pace of construction job growth has been declining on a year-over-year basis since the beginning of 2016 – in recent months, averaging only two to three percent,” he says. Home builders are reporting that the lack of construction workers is hampering their ability to build homes, which is a desperately needed source of supply, as most markets already have very tight inventories of homes for sale. In fact, we have been under-building residential housing relative to demand since 2009.”
Lindsey M. Piegza, chief economist for Stifel, says the March employment report “was a mixed bag, to say the least.”
“Looking past the headline rise in payrolls, the weakest monthly gain in 10 months, the jobless rate unexpectedly fell to the lowest level in nearly a decade,” Piegza says. “Of course, wage growth, one of the key factors of labor market strength from the Fed’s perspective, slipped marginally to 2.7 percent, suggesting waning support to earnings as we head into the second quarter.”