Freddie Mac: Look Beyond Recent Job News to Larger Trends

Freddie Mac's economists advise readers of its April Economic and Housing Outlook to look at employment growth over the past few months rather than the disappointing labor markets' news in March.  To do so enables one, they say, to see that certain sectors such as construction have realized strong gains.

From April 2006 when construction employment peaked to December 2010 the economy lost 5.5 million nonfarm jobs, 2.2 million or 40 percent of which were in construction.  Over the next 26 months ending in March 2013 the economy gained 4.8 million jobs, only 330,000 or 7 percent of which were in construction.  In recent months however the pace of construction job growth has accelerated; it represented 8 percent of job gains over the last year and 15 percent over the last six months.

This acceleration is reflected in housing starts which were up 47 percent from March 2012 to March 2013, passing 1 million starts on an annualized basis for the first time since June 2008.  Builder confidence as measured by the National Association of Homebuilders Housing Market Index (NAHB HMI) has also increased - from 24 in April 2012 to 46 this month.  However, even as it almost doubled the index shows that builders are not really optimistic about housing markets; they are just much less pessimistic. The index declined in March and April, but the component of the NAHB HMI measuring expectations of sales over the next 6 months has consistently improved and is currently at 53, meaning on average builders are expecting to see sales improve over the next 6 months.

Due largely to the disappointing economic news and jobs report and a continued flight to safety, mortgage rates fell during the first two weeks of April.  In the first week the 30-year mortgage rate for single-family loans was only 12 basis points above its all-time low of 3.31 reached in November 2012.

Freddie Mac's economists say the lower rates should translate into a higher forecast for mortgage originations than anticipated earlier in the year and they now project no more than a 10 percent decline in single family originations compared to 2011.  The recent extension of the Home Affordable Refinance Program (HARP) through the end of 2015 has also caused them to increase projected refinance volume by $100 billion to account for additional HARP refinances. For apartment buildings, a gain in property sales, increase in permanent financing due to newly completed structures, and continuing strong refinances should push origination volume in 2013 to about $150 billion, and total residential lending to nearly $2 trillion.

The Outlook says the recent disappointing labor market news should serve as a reminder of how far the economy needs to go to get back to a healthy level and increases in employment across the board is key to robust growth.  "Construction employment is showing signs of life, which should help to improve the overall macroeconomic picture. Housing construction is starting to pick up, but is well below historical averages. Supported by low mortgage rates we expect more homes to be built in 2013 than in any year since 2007. This increased construction employment should continue to help bring down the overall unemployment rate and build a lasting recovery," the report concludes.