Labor shortages -- not the Fed -- drive home prices: Gadfly

by MPA17 Dec 2015
Editor’s note: This article was written just prior to the Fed’s decision to raise its benchmark rate

The Fed is expected to raise its benchmark rate for the first time since 2006, meaning mortgage rate hikes are likely to follow. Small mortgage-rate increases and, by extension, incrementally higher monthly mortgage payments, usually won't undermine sales because buyers aren't sensitive to small payment changes.

Mortgage rates, still at historic lows, have already baked in an expected rate increase of 25 basis points, according to PwC Real Estate Advisory Leader Mitch Roschelle. The National Association of Home Builders Chief Economist David Crowe agrees, adding that the housing market could even digest a cumulative 50 basis point hike by the end of 2016.

The real stress in the housing market is coming from somewhere else: labor shortages.

Labor shortages in the construction industry as a whole actually have a much greater impact on home prices than interest rates. According to a June survey by the NAHB, 61 percent of homebuilders during the previous 12 months had raised home prices due to labor shortages across construction trades. Data from the Bureau of Labor Statistics below shows that the rate of construction job openings has outpaced hiring, reflecting the shortage.

Reasons for labor shortages in construction vary from low pay to potential employees with inadequate skills. It's difficult to get people to train for vocational jobs in a field that has already been decimated by job losses. But now that housing demand is up, demand for construction workers is following suit. Labor costs matter, of course, because they represent the second biggest component of new home prices (outranked only by raw materials).

Home prices are already hitting some ceilings. Even people in the high end of the housing market -- the affluent saviors whose hunger for homes led builders out of the housing crisis that erupted in 2008 -- are balking at higher prices.

Take a look below at the Housing Affordability Index, which accounts for national home prices and income data. Affordability levels are headed toward pre-recession levels. So it's rising prices driven by labor shortages -- and not modest Fed moves - - that may keep homebuyers on the sidelines.

Bloomberg View
Rani Molla


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