Second-Half Preview: The Future of Jobs and Housing

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Do you smell that?

It's starting to smell a lot like last year.

Then, the economy and stock market boomed for the first few months of the year only to peter out in summer. Same deal this year -- so far at least. The first few months brought the strongest job gains in years, a booming stock market, and hope that things were really turning the corner.

Now we're back to questions. Worries. Whispers. Jobs numbers are miserable. Gross domestic product is slowing. Stocks are down seven of the last eight weeks. Don't even ask about housing.

Time to worry? Who knows. But here's a bit of solace: Of the past 10 recessions, at least six have seen a major slowdown in the middle of what became an otherwise solid recovery. Nothing goes straight up. If the current slowdown is something more sinister than a normal quiver, it isn't -- and can't -- be known right now. Economies have too many moving parts to make accurate forecasts.

Still, it's helpful to know the broad points. Right now, two things in particular are on people's minds: jobs and housing. Here are a few things to ponder when considering where each is headed for the rest of the year.

There are two things you need to know about the job market.

The first is that creating jobs doesn't necessarily bring down the unemployment rate. Every month, roughly 150,000 new workers enter the job market through population growth and immigration. We need to add enough jobs to cover these new entrants just to keep the unemployment rate from rising. The monthly jobs gain over the past six months has averaged 155,000 -- just barely enough to break even.

Similarly, the employment population ratio -- the number of able-bodied working-age people who are employed -- is now just 58%, down from 63% a few years ago and an average of 62% over the past 20 years. A lot of people who could be working aren't, either because they've given up looking for a job or have gone back to school to wait out the recession (I can't tell you how many people I know are in the latter group). Once the economy perks up, many of these folks will re-enter the job market, effectively adding more "new" workers to the 150,000-per-month already entering from population growth.

Bottom line: Job growth could surge without putting a dent in the unemployment rate. Last week, Federal Reserve Chairman Ben Bernanke said, "We're still years away from full employment." He's almost certainly right.

The other thing to know about the job market is how misleading the nationwide average is.

The job market as it pertains to you depends on three questions: How old are you? How educated are you? Where do you live?

Unemployment rates by state range from 4.8% in South Dakota to 12.1% in Nevada. Break it up by other factors and the range is even more dramatic. When joblessness peaked in late 2009, unemployment rates ranged from 28% for young, uneducated males, to 4.1% for educated females over age 45. Among all ages and both sexes, unemployment rates in 2010 ranged from 1.9% for those with doctoral degrees to nearly 15% for those without a high school diploma. The nationwide average unemployment rate is largely irrelevant when feeling out your own prospects. You have to look at your individual circumstances and go from there.

The health of all assets rests on valuation. Housing is no different.

The good news is that housing valuations nationwide now look decent. Home prices as a percentage of average income, for example, are now below historic averages.

But like the jobs market, nationwide averages can be misleading. Housing's prospects rely overwhelmingly on one question: Where do you live?

Here, the news is more mixed. The rough historic rule of thumb is that renting is preferable to owning when the price-to-rent ratio (home price/12 months rent) exceeds 15, and owning becomes superior when it falls below 15. Today, plenty of metropolitan areas are at or below 15 after surging far beyond during the housing bubble. Sacramento, Calif., Chicago, Los Angeles, Tampa, Fla., Orlando, Fla., and Phoenix, to name a few, all have price-to-rent ratios at or below 15. On the other hand, San Francisco, Seattle, Denver, and Washington, D.C., to name a few, are still well above 15, and well above their respective long-term averages. (For a more detailed view, see here. )

Even where prices look reasonable, a question lingers whether they will get more reasonable. Prices don't tend to simply fall back to averages after bubbles burst. They drop below average and stay there until emotional scars heal. That can last years. Exacerbating the pain, there's still a tremendous amount of unsold homes either on, or about to become on, the market, putting a downward weight on prices. That should last at least another year or two as inventory is cleared out.

See where this is going? Many housing economists don't expect the nationwide market to return to normal until late 2012 at the earliest. My bet is with them. And when housing does recover, keep in mind that normal housing appreciation is 2%-3% annually -- not 20%, as some came to expect during the bubble.                     

Where do you think we're headed next? Let us know in the comment section below.

Fool contributor Morgan Housel doesn't own shares of any of the companies mentioned in this article. 

Follow him on Twitter @TMFHousel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (24) | Recommend This Article (57)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 27, 2011, at 5:26 PM, xetn wrote:

    Perhaps this article will help with the analysis of the economy:

  • Report this Comment On June 27, 2011, at 5:26 PM, cduance wrote:

    it would be interesting to see the housing appreciation figures per year for the past 20 years. I am assuming there will be a figure or amount of time at a figure that would mean we were nearing a crash in the property market.

  • Report this Comment On June 27, 2011, at 5:40 PM, crmeyer81 wrote:

    One other ominous housing tidbit is that we're in the midst of another new wave of adjustable rate mortgages resets which will peak in September 2011 and then tailing off in September 2012. This includes Sub-prime, Prime, Alt A, and Option Arms with Sub-primes and Primes peaking at $16 to 18 Billion of total loan balances. If jobs aren't picking up, then there will be more keys in the mailboxes.

  • Report this Comment On June 27, 2011, at 5:48 PM, razzamatazzer1 wrote:

    It ought to be said,that the world economy also affects the US.Another reason why it is like it is...

  • Report this Comment On June 27, 2011, at 6:09 PM, Borbality wrote:

    if housing "returns to normal" by the end of 2012 we should be ecstatic beyond words. I'm thinking more like 2015

  • Report this Comment On June 27, 2011, at 6:10 PM, robmac2811 wrote:

    I'm in the wood component manufacturing business and by far this is my worst year in 18 years. I don't see a turn around for the housing industry until at least 2014. I'm hoping that I can be a survivor and come out stronger on the other end. It's bad,bad,bad. I wish Obama would come and visit me to see what the real world is like!

  • Report this Comment On June 27, 2011, at 6:17 PM, HarryPiels wrote:

    Well, the election isn't too far away and that should bring some sort of action to stoke things up. I still think the best and fastest relief would be to stop the flow of millions of immigrants that stand beside those already here in the unemployment lines. They cause huge expenses in schools, health care, prisons, and welfare . If they have one child here he's granted automatic citizenship and bingo! you have a huge tax bill.. There's almost no chance these folks are going back home. That will add to deficits but Washington seems intent on keeping your wages low.

  • Report this Comment On June 27, 2011, at 7:05 PM, Davemuse wrote:

    Read the 1st reader post by Lew Rockwell, whose thoughts make a great deal of sense. As is so often in our current lives, folks who have real understanding of what is going on refuse to speak the truth.

  • Report this Comment On June 27, 2011, at 7:49 PM, chip1945 wrote:

    Despite retirement this year, we have put off "selling the big house" until 2020 in our 'Retirement Plan.' We think this represents a reasonable time period for the excess housing inventory to be absorbed, and more normal price increases to begin. In general for our area in New England, we expect to sell in 2020 for the market value of 2003-2004. Our vacation home in Florida is another story, but we do not intend to sell that.

  • Report this Comment On June 27, 2011, at 8:21 PM, bid1010 wrote:

    "creating jobs doesn't necessarily bring down the unemployment rate"... Interesting numbers regarding population increase and immigration. I'm curious how does the attrition rate factor into those numbers. I realize the American worker is working longer to afford retirement and improvements in technology and medicine have extended the average life expectancy; but, people still retire/quit/passaway every month.

  • Report this Comment On June 27, 2011, at 8:41 PM, ETFsRule wrote:


    Here are housing prices:

    Here's the same graph (on a shorter time frame) with the vacancy rate added on the right-hand scale:

    Here is housing starts along with the vacancy rate:

    And, house prices along with housing starts:

    We were overbuilding at the same time that house prices were being inflated. Both of these factors contributed to the crash... which is why it sucked so bad.

  • Report this Comment On June 27, 2011, at 8:49 PM, 51525 wrote:

    Just think how many jobs would open up if we would send all the illegals back where they came from. Those who work, work for less, in many cases work under the table so pay no taxes, and expect our citizens to offer free medical, food stamps and feed their children in our schools. If we sould move them home those jobs would still be there and pay a higher wage. It would cut the cost of schools, medical costs and police work. Why not??? Sillywillie

  • Report this Comment On June 27, 2011, at 9:38 PM, Mark10007 wrote:

    Because you silly willie, those are very ones that got Obama in; Therefore, they're going no where

  • Report this Comment On June 27, 2011, at 9:49 PM, Joemit wrote:

    ETFs - thanks for the charts and graphs, I especially like ( and I use that term perjoritively) the last chart with housing starts juxtaposed with prices.

    That was a several year loss in the old standby of housing prices increasing at a 3-5% standard rate....

    I am 54 and have already decided that I will have to wait at least 3 extra years (until 67) before I can retire and may have to wait until age 70. I keep adding to IRA and Roth but they don't seem to be going anywhere....

  • Report this Comment On June 27, 2011, at 10:20 PM, cva10 wrote:

    Only fools will believe in any real recovery as long as the socialist and muslim super fool is in the oval office.

  • Report this Comment On June 27, 2011, at 11:01 PM, Edover50 wrote:

    You asked "Where do you think we are headed next?" Here is my answer: Totally down the tubes completely. Sorry I am so negative. The U.S. government is totally bankrupt and still trying to borrow more money. Just give it a little while longer. We will look like Greece - American citizens rioting in the streets. It is not going to be pretty when it happens either.

  • Report this Comment On June 28, 2011, at 8:02 AM, marichel wrote:

    You didn't mention the effect that all the baby-boomers retiring over the next 10+ years will have. I thought I read/heard that this would create of shortage of skilled workers in the job market.

  • Report this Comment On June 28, 2011, at 10:18 AM, acssgt316 wrote:

    Another great article by Morgan. There are a few things I found interesting though.

    "The good news is that housing valuations nationwide now look decent. Home prices as a percentage of average income, for example, are now below historic averages."

    That is assuming that the fundamental way we each personally view and value housing hasn't changed permanently. I think people are now more averse to being mortgage poor than they have been in a very long time.

    "The rough historic rule of thumb is that renting is preferable to owning when the price-to-rent ratio (home price/12 months rent) exceeds 15, and owning becomes superior when it falls below 15"

    Im not sure I like this metric so much. I look at it like this: My rent is 1000 a month and owning a home would cost 2000. My cost of living for the next 30 years is 360,000 as opposed to 720,000. The premium for owning my own place is 360,000. That to me is not cost effective. I may be saying the same thing with different math. Either way I enjoyed the article.

  • Report this Comment On June 28, 2011, at 10:27 AM, aconlan wrote:

    I heard a vicious rumor that the Fed is going to mandata that you will need a minimum of 25% down in order to qualify for a mortgage. This will take effect on September 20th - what will this do to the housing forecast and economy?

  • Report this Comment On June 28, 2011, at 12:04 PM, ETFsRule wrote:

    "I look at it like this: My rent is 1000 a month and owning a home would cost 2000. My cost of living for the next 30 years is 360,000 as opposed to 720,000. The premium for owning my own place is 360,000."

    Your cost to rent that same apartment for 30 years will be a lot more than $360,000, because rents will keep going up every year. Assuming rents go up by 3% per year, your rent will be $2000 in roughly 24 years. Mortgage payments stay pretty much the same.

    Also, if you expect to live for more than 30 years, the case for buying a home becomes a lot stronger.

  • Report this Comment On June 28, 2011, at 12:24 PM, Borbality wrote:

    Have to go with ETFsRule on this one. Everyone talks about how much it costs to own a house but never mentions the fact that you can actually pay off a home. Of course, there's still taxes and insurance and that sort of thing, but I bought a home when I was 24 and hope to be living rent or mortgage free before I turn 55. And I imagine any savings from real estate "investment" in your primary residence wouldn't make up for 20-30 years of no payments at all.

  • Report this Comment On June 28, 2011, at 4:07 PM, TimsRedbeard wrote:

    I suggest anyone interested in "how our economy" is doing is checking this web - site run by our government.

    As of June 28, 2011 some of the facts showing are

    (I have rounded these numbers)

    United States info

    Population 312 million

    Income taxpayers 112 million

    Workforce 140 million

    Official unemployment 9.9%

    Actual unemployment 24 million

    Actual TRUE employment then = 17.3% (24 mill/140mill x 100)

    Go to the web site which covers much much more information. It will enlighten you regarding the poor finances we are in.


  • Report this Comment On June 29, 2011, at 11:50 AM, jrj90620 wrote:

    Seems like a lot of demand for U.S. housing is coming from overseas investors.I guess if/when the Dollar falls further,that should increase buying.So,while Americans get poorer foreigners will buy our underpriced housing.One way or the other,assets that are underpriced will not stay that way forever.

  • Report this Comment On July 04, 2011, at 8:26 PM, kpole wrote:


    The 155,000 jobs that need to be created in order to keep up with additions to the workforce is a net number. Unfortunately for younger workers, a lot of older workers are putting off retirement a few years. They're choosing to work longer because the value of their retirement savings crashed with the stock market in 2008.

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