The housing market’s quiet tailwind: low unemployment The persistent strength of the U.S. labor market has prevented a greater pullback in both housing prices and homebuilding activity.

 In 2022, Federal Reserve Chair Jerome Powell expressed concerns about the overheated U.S. housing market and labor market, highlighting the need for both to be reined in. As of September 2023, the national housing market has shown a significant deceleration in overheating, with U.S. home prices rising by +1.3% from June 2022 to September 2023, a sharp contrast to the historic +26.2% gain in the previous 15 months (March 2021 to June 2022).

In contrast, the U.S. labor market has remained strong, with the unemployment rate in November standing at 3.7%, only marginally higher than the 3.6% rate observed in March 2022 when the Fed initiated interest rate hikes. Despite challenges in the housing market, such as a substantial increase in mortgage rates from 3% to over 7%, resulting in affordability levels not seen since the early 1980s, the robust labor market and tight resale supply have helped alleviate the impact. This interplay has possibly prevented a more significant pullback in housing prices and homebuilding activity.

Furthermore, areas known for tech innovation, which experienced more pronounced labor softening in the latter half of 2022, also witnessed more significant declines in home prices. Notably, the resilience of the U.S. labor market can be seen through historical data, illustrated in the chart below dating back to 1970, where dark red indicates a red-hot labor market and dark blue represents 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.