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Real Estate Market Commentary - December 2014
by Peter L. Zachary, MAI, MRICS

The Sunday New York Times on December 6, 2014 had a front page article written by Nelson D. Schwartz entitled, “Big Job Gains And Raising Pay In Labor Data – An Economic Recovery Starts to Hit Home”. The article stated:

"Ever since the recovery from the Great Recession began more than five years ago, the most crucial missing pieces of the economic puzzle were the lack of consistently strong gains in hiring and better wages for most working Americans struggling to make ends meet. Now, at last, those pieces are starting to fall into place.

The Labor Department reported on Friday that employers added 321,000 jobs in November, a much stronger number than economists had predicted and the 10th consecutive month of net job gains above 200,000.

Even more significant was that the improving job market finally delivered a sharp jump in average hourly earnings for ordinary workers that was double the anticipated 0.2 percent increase.

The jobless rate itself stayed at 5.8 percent.

The pickup in wage growth comes as gasoline prices are plunging, providing a double boon for consumers and retailers with the holiday shopping season underway.

With one month still to go, the total increase in payrolls of 2.65 million is already the best annual figure since the late 1990s.

"In one line: spectacular and, more to the point, believable,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics.

“We’ve had strong hiring indicators in a number of surveys, and lower jobless claims, so sooner or later, we were going to get a blockbuster number."

In economics most things cut both ways, however, and Friday’s report was no exception. The steadily improving labor market makes it more likely the Federal Reserve will start raising short-term interest rates sooner rather than later, which could lead to some turmoil in financial markets in the months ahead.

Most economists expect the central bank to increase interest rates in mid-2015, after leaving them near zero since the depths of the financial crisis in late 2008.

Some experts now argue that the Fed may move to raise its key interest rate lever as early as March next year, but most are still sticking with midyear.

In addition, some of the worrisome signs that have haunted the monthly jobs report for years have not gone away.

The proportion of people in the labor force was unchanged last month and is stuck near multidecade lows, an indication that few of the workers who gave up the search for work during the lean years are likely to be hired anytime soon.

In addition, about 6.9 million Americans are working part time because they cannot find full-time positions. The broadest measure of unemployment, which includes these workers, dropped to 11.3 percent, down 0.1 percent from October.

The November data alone isn’t enough to shift the Fed’s thinking, said Guy Berger, United States economist at RBS. "In all likelihood, we will see faster wage growth over the next six months, but as far as the Fed is concerned, one month alone could be noise," he said.

"Our view now is that the first rate hike will come in June."

In particular, Mr. Berger noted that there was a risk the jump in hourly earnings represented a catch-up from the weak readings the previous two months.

"The coming months will tell us whether November was a fluke or the beginning of a sustained pickup from the 2 percent annual wage gains we’ve had over the past four years," he said.

If the Federal Reserve raises interest rates next year, the real estate sector could be dealt a setback, especially in more affluent areas where home prices have surged.

So why the persistent gloom, not to mention anger?

Until now, wage gains for most Americans who kept their jobs throughout the downturn and recovery have been very modest. The 2.1 percent wage increase over the last 12 months is barely enough to keep up with inflation.

For wages to show meaningful gains over a sustained period of time, as was the case in the 1990s, the unemployment rate will have to drop further, perhaps below 5 percent, said Diane Swonk, chief economist at Mesirow Financial.

Just how low unemployment can go without stoking inflation is set to become the next big economic argument in Washington as well as on Wall Street. On Capitol Hill, some Republicans say the Fed should move more aggressively to tighten its monetary stance.

"As the job market improves, the Federal Reserve must begin to normalize monetary policy," said Representative Kevin P. Brady, a Texas Republican who is chairman of the Joint Economic Committee.

But Ms. Swonk, like many other economists, says it is critical that the central bank not move too quickly now that the recovery finally seems to be settling into higher gear.

"We are still regaining ground lost by many households, and we don’t want to squander that," Ms. Swonk said. "We’re not back to the 1990s, nowhere near it. But the good news is that we’re making progress."

More to come next month. Read previous Real Estate & Housing Market News.

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