Housing Uptick Creates Jobs
No discussion of the prospects for our economy in 2012 would be complete without an examination of the housing sector. As daunting as the debt crisis in Europe is, there is no doubt that the real “X” factor is housing.
But this topic is complex and hard to sort out. For example, we know that the housing sector will not rebound without employment strengthening. But we also know that the housing sector is very important in creating employment. If that sounds like a catch-22, it is. And it is one of the main reasons our recovery has been tepid up to now.
We also believe that it is no coincidence that the housing market seems to be improving now that the employment sector is also getting stronger. Of course, we will know more about how strong the employment sector is today (Friday) when we see the release of January’s employment report. Regardless of the results of this report, we do know employment growth was stronger in 2011, especially towards the end of the year. In December, first-time unemployment claims fell to their lowest levels since April of 2008.
We also know that existing home sales and starts for single-family homes also have increased in the last quarter of 2011. Again, no coincidence. The National Association of Home Builders has indicated that every single-family home built creates three jobs. To put it another way, just over 425,000 single-family homes were built last year. That is more than 1 million jobs. Sound impressive? It is still a few million jobs less than the sector produced during the real estate boom years. An increase of 100,000 houses this year would create 300,000 additional jobs and that does not include the apartment sector, which is starting to boom, and the commercial sector, which has yet to awaken from its slumber. Conceivably, we could see close to 500,000 additional jobs created this year with modest growth in building.
Even more importantly, those jobs create even more demand for housing. Will this happen? Next week, we will start looking at possibilities, but only the data will give us the real answer.
Two key measures now suggest it’s an excellent time to buy a house, either to live in for the long term or for investment income. First, the nation’s ratio of house prices to yearly rents is nearly restored to its pre-bubble average. Second, when rates are taken into consideration, houses are the most affordable they have been in decades.
Whether buying is a better deal than renting isn’t a stagnant fact but a changing condition that depends on the relationship between prices and rents, the cost of financing and other factors. But the math is turning in buyers’ favor. Stock-oriented folks can think of a house’s price/rent ratio as akin to a stock’s price/earnings ratio, in that it compares the cost of an asset with the money the asset is capable of generating. For investors, a lower ratio suggests more income for the price. For prospective homeowners, a lower ratio makes owning more attractive than renting, all else equal.
Nationwide, the ratio of home prices to yearly rents is 11.3, down from 18.5 at the peak of the bubble, according to Moody’s Analytics. The average from 1989 to 2003 was about 10, so valuations aren’t quite back to normal.
But for most homebuyers, rates are a key determinant of their total costs. Rates are so low now that houses in many markets look like bargains, even if price/rent ratios aren’t hitting new lows. As a result, house payments are more affordable than they have been in decades. Source: Smart Money