Considering when or if to sell your house? You may want to take a look at the job market before putting that for-sale sign on your lawn.
"Everything in the housing market ultimately depends on how many people in an area are employed, since without a stable source of income, they cannot obtain and pay back a mortgage," said Christopher Maloney, a mortgage strategist within the institutional sales and trading department of BOK Financial®.
In other words, when there's low unemployment and an abundance of job openings, it's a better time to sell your house than when the unemployment rate is rising and it's more difficult for people to find a job.
How long will low unemployment last?
The good news is the resilience of the job market, which has remained strong despite the Fed's efforts to slow the economy to combat inflation. In July, the most recent month for which national data is available, the unemployment rate was mostly unchanged at 3.5% and total nonfarm payroll employment actually rose by 187,000.
That resiliency has persisted at a state-by-state level, too. For example, 36 states including Oklahoma, Arkansas, Colorado, and Kansas all had unemployment rates at or below 3.5%, as of July.
The less-than-good news: As we continue to feel the affect of the Fed’s rate hikes, unemployment likely will rise—by design. If the strength of the housing market depends on the number of people in an area with a job, then the number of potential homebuyers will likely fall as unemployment increases, based on Maloney's reasoning.
“Employment in our Midwest and Southwestern footprint is, for the most part, probably as good as it's going to get, whether or not we experience a recession by year-end. This means that when it comes to home sales one should consider striking while the iron is hot.”- Christopher Maloney, a mortgage strategist within the institutional sales and trading department
Undersupply buoying demand and home prices
At the same time, the fact that unemployment will likely rise doesn't mean the demand for new homes will suddenly grind to a halt, either. Case in point: the housing market's current resiliency.
"The housing market tends to be a pretty interest rate-sensitive area of the economy, and as much as rates have moved up, it has been more resilient than what we would have expected," said Steve Wyett, BOK Financial chief investment strategist.
One factor that has prevented home prices from falling rapidly is the undersupply of available homes, Wyett said. Housing starts have not fully recovered since the 2007-2009 financial crisis, even as the population has continued to grow.
Today, homebuilders are facing pressure from rising mortgage rates and high construction costs due to shortages in construction workers, buildable lots and electrical transformers, according to the National Association of Home Builders (NAHB).
As a result of these concerns, homebuilders' confidence fell in August to the lowest level since May, based on the National Association of Home Builders/Wells Fargo Housing Market Index.
Meanwhile, homeowners who have fixed-rate mortgages are reluctant to sell and face higher rates, Maloney said. "Everyone and their brother refinanced from 2020 to 2022. What that has done is, if you look at the universe of American homeowners right now wrapped in 30-year mortgages, three-quarters of them are paying rates of 4% or less.
"With 30-year mortgage lending rates trending at 7%, right now they have no incentive to refinance or cash out."
Home buyers have been feeling this shortage of both new and used homes most acutely in states where there has been high population growth. This has been particularly the case in states such as Texas, Arkansas, Colorado and Arizona—where from 2016 through the end of 2021 there was greater-than-average increase in the number of 20- through 34-year-olds, the age group comprising the majority of first-time home buyers, Maloney said.
Looking forward, experts don't expect these factors contributing to the undersupply of homes—and thus elevated home prices—to go away anytime soon.
"We're not building enough houses, so it's just supply and demand." Wyett said. "Unless there's something out there that's going to trigger a significant supply of homes for sale in excess of this pool of demand that's out there, it's hard to see prices going down significantly."