Daily Forecast Update: Employment Data

February 5, 2010

By Lawrence Yun, Chief Economist

Daily Forecast Update

• NAR's monthly official forecast as of February 2nd
• GDP 2010 Q1: +2.1%
• GDP 2010 Q2: +2.1%
• GDP 2010 Q3: +2.5%
• Unemployment rate by the mid-2010: 10.1%
• Average 30-year fixed mortgage rate by the mid-2010: 5.4%

What does today's data mean for REALTORS® and consumers?

• A twilight zone is upon us. There were net payroll job losses in January yet the unemployment rate fell. In coming months, jobs will be created while the unemployment rate rises.
• Mortgage rates will not be at rock-bottom rates for long. But be assured that the rates will not rise at an alarming pace.
• Commercial real estate values continue to fall. Even though there were no subprime and other sneaky loans in commercial real estate, the average commercial property value has fallen by even more than the average residential value.

Official Employment Data

• There are several jobs data but the key and the most comprehensive is from the Bureau of Labor Statistics released first Friday each month. In January, payroll jobs fell by 20,000 and are now down by 8.4 million since the beginning of the recession two years ago.
• The unemployment rate fell nonetheless because the unemployment is not based on company data but from asking people if they have a job. In this people survey (not company data), there were 541,000 job additions in January after having tumbled by 589,000 in December. The people survey data is subject to bigger statistical noises because of the much smaller data sample size. Also, a person has to be looking for a job to be counted as unemployed and there are a sizable number of people who simply stopped looking in recent months and hence not counted as being unemployed.
• Construction employment fell hard again, this time by 75,000 in January (after accounting for normal seasonal weakness in winter months). The lack of commercial real estate construction was a big factor. Employment in rental and leasing companies fell by 2,600. From one year ago (January 2009 to January 2010), construction employment fell by over 900,000 while rental and leasing jobs declined 96,800. Construction jobs are now lower by over 2 million from the peak few years back.
• The NAR membership in January was 1.094 million, which is down from 1.152 million one year ago and down from 1.4 million at peak in 2007.
• In other noteworthy sectors, manufacturing continues to take hit. Since the high mark of 17.5 million workers in the manufacturing sector, there are now only 11.5 million workers in the sector. Jobs in the professional business service sector (like accounting, management consulting, and law offices) rose by 44,000 in January and for the fourth straight month, which may hint a potential recovery for office space demand for commercial REALTORS. Temporary help employment rose for the fourth straight month. Because many companies first turn to temp jobs coming out of a recession, the rising trend should imply permanent job creations starting in few months.
• Jobs at state and local governments fell slightly in January. There will be pressure throughout this year for further job cuts as most state and local governments are running relatively high budget deficits and generally have to balance the books by law. The federal government hired 33,000, greatly benefiting the D.C. surrounding region.
• The average hourly earnings of all private sector employees rose by 4 cents to $22.45 in January. From one year ago, wages are up by only 2.0 percent, the slowest gain in about 5 years. However, because cost of living as measured by the Consumer Price Index fell slightly in 2009, the low wage gain still implies a gain in purchasing power. Of course, that is no solace for people without a job.
• The unemployment rate could easily peak at even 10.5 percent, particularly if many of the discouraged workers re-enter the labor force and start applying for a job. The peak will likely be within the first quarter of 2010. After peaking the unemployment rate will slowly decline. It could be at 10 percent by November election time.

Fed’s Mortgage Securities Purchase Program

• The Federal Reserve is soon to end its mortgage securities purchase program in March as scheduled. The purchases to the tune of $1 trillion in the past year have kept mortgage rates at rock bottom lows of about 5 percent (though not for jumbo, second home, or commercial real estate mortgages). Without this program, there are fears that mortgage rates will quickly swing higher.
• That fear is misplaced. First, the Fed has already begun to be less active in buying mortgage securities in recent weeks as it had last year. Even so, the mortgage rates have barely moved. The 30-year fixed rate on conforming loans averaged 5.01 percent this week. The private market has shown willingness to step into the mortgage purchase market just as the Fed steps out.
• In addition to the private market stepping in, the New York Fed chief has stated publicly that the Federal Reserve will resume active purchases if mortgage rates were to spike higher later for whatever reasons.
• Be mindful that this special Fed program cannot and should not run indefinitely. The Fed is purchasing mortgages with freshly printed money. This policy can work in the short term for getting the housing and the economy back on track but this policy if prolonged will certainly cause damage over the long run with high inflation if the program is not wind down.

Commercial Real Estate Values

• According to MIT Center for Real Estate, commercial real estate values fell 4.9 percent in the fourth quarter of 2009 from the prior quarter. From the peak in 2007, commercial values have fallen 40 percent – compared to 25 to 33 percent in residential home prices.
• Transaction observations increased 1 percent among properties covered by NCREIF members. The ever so modest gain is coming off from very low levels of transaction activity in the first half of 2009.
• Unlike the residential market, a severe lack of credit crunch had essentially halted commercial deals for most of 2009. Now that banks and financial institutions are making profits and their capital reserves rising, it is just a matter of time they get back to the business of lending. So there should be some improvement for lending into commercial real estate in 2010, though by no means back to normal. The Treasury is also working with private banks to help with commercial real estate loans that need to be refinanced this year.

This is one in a series of commentaries by the Research staff of the National Association of REALTORS®. Read more commentaries >

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