November Job Creations Far Below Expectations

The news on job creations in November was disappointing, as the spike in COVID cases continues to impact people and businesses across the country. Yet demand for homes remains strong and home prices continue to appreciate.

November Job Creations Fall Short of Expectations

There were just 245,000 job gains in November, which was about half of market expectations, per the Bureau of Labor Statistics (BLS).

Looking closely at the numbers, there are two reports within the Jobs Report and there is a fundamental difference between them. The Business Survey is where the headline job number comes from and it's based predominately on modeling.

The Household Survey, where the Unemployment Rate comes from, is done by actual phone calls to 60,000 homes. The Household Survey also has a job loss or creation component, meaning it may be more reflective of actual job numbers, and the Household Survey showed there were 74,000 job losses.

The Unemployment Rate decreased from 6.9% to 6.7%, which was stronger than expectations of 6.8%. Unfortunately, the decline was for the wrong reasons, as the labor force shrunk by 400,000 people. This is why the unemployment rate improved even though the Household Survey showed that there were 74,000 job losses.

In addition, there has been a misclassification error where people were classified as absent from work for other reasons and not marked as unemployed on temporary layoff when they should have been. Without this error, the unemployment rate would have been 0.4% higher or 7.1%.

The all in U6 Unemployment Rate, which includes total unemployed, plus all persons marginally attached to the labor force, plus total employed part time for economic reasons, decreased from 12.1% to 12.0%.

Average hourly earnings decreased from 4.5% to 4.4% year over year. Average weekly earnings, which we focus on more, rose by 5.9%, up from 5.7%. See below why this is important when it comes to home prices and appreciation.

Private Payrolls Also Below Expectations

The ADP Employment Report, which measures private sector payrolls, showed that there was a gain of 307,000 jobs in November, which was lower than the 420,000 expected. October’s report was revised slightly higher by 39,000 additional jobs, from 365,000 to 404,000, but overall this report was a disappointment.

After losing almost 20 million private jobs in March and April, we have only recaptured 10 million. Why are job gains fading? Unfortunately, the main reason is that companies are closing and the Paycheck Protection Program money that was keeping many of these companies afloat has run out.

Jobless Claims Declining for Wrong Reasons

Another 712,000 people filed for unemployment benefits for the first time during the week ending November 28. While this is a decrease of 75,000 people from the previous report, the data is for Thanksgiving week when many people may not have filed. It’s also hard to make adjustments that are accurate to compensate for this.

Continuing Claims, which measures people who continue to receive benefits, did improve by 569,000 to 5.520 million. Note that this figure is delayed a week and did not include Thanksgiving week.

While the number of Continuing Claims has been improving in the past few weeks, it's important to put this in perspective. When regular benefits expire, people can file for Pandemic Emergency Unemployment Compensation (PEUC), which extends their benefits another 13 weeks – and that figure increased by 60,000. While there is still a net benefit of 500,000 people dropping off of Continuing Claims, in most cases this is due to benefits expiring and not people returning to work.

In addition, it’s estimated that by Christmas another 12 million individuals will see their benefits expire. Without a new stimulus plan, these people could face tremendous hardship.

Low Supply Impacts Pending Home Sales

Pending Home Sales, which measures signed contracts on existing homes, were down 1.1% from September to October. While this was less than the 2% monthly gain expected, sales were still up 20.2% compared to October of last year.

The decline in signed contracts from September to October is not due to a lack of demand but a lack of supply, with the supply of existing homes down 20% when compared to October of last year. When you think about it, it's quite impressive that sales are up 20.2% year over year while inventory is down 20%.

Quite simply, if there were more homes on the market, there would have been more signed contracts.

Appreciation Forecasts on the Move

CoreLogic's Home Price Index report showed that home prices increased 1.1% from September to October and 7.3% when compared to October of last year. This annual reading is a big improvement from the 6.7% year over year appreciation figure reported for September. The hottest markets were Phoenix (+12.1%), San Diego (+8.3%) and Washington DC (+ 7.1%).

Prices for single-family, detached homes rose by 7.9% year over year, while attached homes only rose by 4.5%. This supports the theme that condos are appreciating at a slower pace than standalone homes.

CoreLogic forecasted that home prices will rise 0.4% from October to November and 1.9% in the year going forward, which is a huge revision to their 0.2% annual forecast in the previous report. Also of note, not that long ago, CoreLogic was expecting a negative 6.6% annual appreciation.

Part of the change in forecast is related to something we've been discussing recently: birth statistics which show that the largest wave of millennials are heading into their prime homebuying years. As such, first-time buyers will be a big part of next year’s home purchases, which should continue for several years.

Note also that the weekly earnings figure discussed above measures what people actually take home and it shows that this level of income can support much greater levels of appreciation than we are currently seeing without homes being unaffordable. People don't use their entire income for their mortgage payment, so the weekly earnings figure does not have to rise at the same pace as appreciation.