Housing’s real problem now: job growth at the high end has stalled

For several years now, much of the focus in our industry has been on affordability. Closely tied to that, we have had many discussions regarding existing owners being frozen in place with their low-rate mortgages. No doubt, both are serious headwinds. But increasingly, those are now secondary to our core problem: effectively zero job growth of the type that drives our business. Let us review the data, then flesh it out with anecdotes that tie it together.

Unfortunately, our industry cannot sell homes equally at different price points across all job categories, at least in most major metros. Our buyers are concentrated in higher-paying professions, with arguably the three most important categories being Information, Financial Activities, and Professional and Business Services. You can see in the chart above that, combined, this has flatlined. And it is not just the last 12 months.

Note that in some ways, this is the opposite of what happened at the beginning of the pandemic, when we had massive job losses — but these categories recovered very quickly and confidence in these sectors rebounded (and we sold a lot of houses).

Government has shown growth but is likely to go backward in the next 12 months, or at least flatline. There is no appetite under the current federal administration for growth in employees, and most state and local budgets are under strain.

Leisure and Hospitality gains are largely a rebound that is probably playing out.

Private Education and Health Services growth does not look sustainable to me.

Second, Net Domestic Migration

Lance Lambert has a fantastic chart he has posted to LinkedIn:

My big takeaway from this is that almost everywhere it was good is now weakening. Coincidence with falling high-end job growth? I do not think so.

Economists note that one of the problems with rising affordability challenges in successful metros is that, in the past, when an area was growing, it attracted people seeking a better life to move there, across all income levels. But now, even if moving would raise wages for people, it often won’t offset the higher cost of living. So much of our domestic migration tends to be by equity refugees and/or higher-wage earners. What is the rocket fuel of price growth? No go-go juice for a while?

Third, Anecdotes That May Shed Light

Let us look at some anecdotes that may shed light on whether our affordability problem has morphed into a jobs (category) problem.

In a variety of places, I am hearing from sales managers that most of their sales are converting old leads. Not many new ones are going into the funnel.

Public builders are, one after the other, noting that mortgage buydowns are not working as well as they had previously. They are cutting back on starts, discussing focusing on margins versus velocity. True as far as it goes, but if they thought they could sell four per month without giving them away, I assume they still would be. My words, not theirs, but I read it as they think at this point there is such limited demand that it would be pushing on a string to go for more than 2-2.5 per month. If the issue were simply affordability, would not mortgage incentives be working well (or at least better than they are)?

Recent white-collar job cut announcements are, in the grand scheme of things, not a high percentage of those jobs. But human nature is such that two things are true:

• No one stands around the water cooler at work after layoffs and says to a coworker, “Just ignore it, it’s only a small percentage of the company, it’s statistically irrelevant.”
• No, they discuss whether this is it or whether there will be more. Companies spent years struggling to hire. They kept some people they would rather not have, out of fear that they could not do better. And when everyone is hiring, if you announce layoffs, you risk your company looking in trouble and losing your best employees, who will be scared off. But once some of your peers start cutting, it becomes a permission slip to do the same. Perception changes from “you must be in trouble” to “they are being appropriately proactive.” In my opinion, we are entering the second phase and are not likely to be done with this yet.

Conclusion

I do not think we are headed for a major housing correction. I still think the low lot supply relative to stabilized volumes and the high levels of equity in existing homes mean the most destructive mechanisms for pricing drops are simply not there. But I do not see the catalysts in place to reverse the job problem in the near term. And if I am right—that it is more of a job problem than an affordability problem at this point—even if rates fall, it may not matter as much as we all hope. And so far, the 10-year is becoming disconnected from short rates anyway.

So we should probably be making our business plans around the idea that 2026 is no fun. I would like to say otherwise, but I just do not see it. But I do not think any of these changes affect our long-term undersupply position, so the question is: how do we get from here to there?