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In 2022, Federal Reserve Chair Jerome Powell raised concerns about the overheated U.S. housing market and the U.S. labor market, emphasizing that both needed to be reined in.
Fast-forward to 2023, and the national housing market has stopped overheating. From June 2022 to September 2023, U.S. home prices rose by +1.3%, a significant deceleration compared to the historic +26.2% gain in the preceding 15-month window (March 2021 to June 2022).
However, on a national level the labor market has remained hot. Despite Powell’s acknowledgment of the need for softening in the labor market, the unemployment rate in November stood at 3.7%, only slightly above the 3.6% rate observed in March 2022 when the Fed initiated interest rate hikes.
This persistent strength in the U.S. labor market has also acted as a tailwind for the housing sector. While the housing market has faced challenges—such as a significant increase in mortgage rates from 3% to more than 7%, leading to affordability levels not seen since the early 1980s—the combination of a robust labor market and tight resale supply has mitigated the extent of the impact. This dynamic has arguably prevented a greater pullback in both housing prices and homebuilding activity. Keep in mind that tech hubs, which saw greater labor softening in the second half of 2022, were also the very places that gave up more on home prices.
To understand just how resilient the U.S. labor market has been, let’s examine the historical data. The chart below illustrates the monthly unemployment rate dating back to 1970. (Dark red indicates a red-hot labor market, while dark blue shows an ice-cold labor market.)
Why has the labor market remained so resilient despite the interest rate shock? Some economists argue that demographic shifts, particularly baby boomer retirements, have contributed to maintaining tight conditions in the job market. Others contend that homebuilders with robust balance sheets and profit margins, who have adeptly adjusted net effective prices (utilizing mortgage rate buydowns) and sustained new home sales, have shielded themselves from the layoffs that would typically accompany a rate-hiking cycle.
Looking ahead, the big question centers on the potential softening of the labor market amid the ongoing rate-hiking cycle. The unemployment rate has gradually inched up from 3.4% in January 2023 to 3.9% in October 2023, before falling back to 3.7% in November. In particular, economists are keeping a close eye on multifamily home construction and regional banks.
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