First American

The REconomy Podcast™: Why Labor Market Trends May Keep Mortgage Rates Near Record Lows Longer

In this episode of the REconomy Podcast™ from First American, Chief Economist Mark Fleming and Deputy Chief Economist Odeta Kushi explain why important labor market trends may influence the Federal Reserve’s decision to reverse its easy-money policies.

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Listen to the REconomy Podcast Episode 21:

"There has been talk of the Federal Reserve starting to reverse its easy money policies later this year since the economy has been improving. Now, the Fed’s purchase of mortgage-backed securities, as we've talked in previous episodes, puts downward pressure on mortgage rates. So, it's one of the reasons that mortgage rates have been so low. But, if this deceleration of job growth continues, it may impact the timing of when the Fed slows its bond purchases, keeping rates lower for longer." – Odeta Kushi, deputy chief economist at First American


Odeta Kushi: Hello, and welcome back to another episode of the REconomy podcast where we discuss economic issues that impact real estate, housing and affordability. I'm Odeta Kushi, deputy chief economist at First American. And here with me is Mark Fleming, chief economist at First American. Hi, Mark. Today, we're going to talk about a different market besides housing, and that's the labor market.

Mark Fleming: Hey, Odeta, it's good to be here again, well, that may be a very different market. But it's very impactful to housing for one really simple reason. It's hard to buy a house without a job or income.

Odeta Kushi: Indeed, and today, we want to cover a few different things. We want to talk about the labor market recovery, what may impede it, and finally what the labor recovery means for the housing market. So, let's start with something very basic – the unemployment rate. It's very common to proxy the extent of economic hardship with the unemployment rate. The more households there are with unemployed members, the higher the aggregate level of economic hardship in the economy. We know this. Now, prior to the pandemic in February 2020, the unemployment rate was 3.5%. That was the lowest since 1969. And then the pandemic hit, and the unemployment rate shot up to nearly 15% in April. Now, we all know why, the shutdown of large discretionary consumption segments of the U.S. economy with the intent to slow and prevent the spread of COVID-19 caused one of the fastest and deepest contractions of U.S. economic activity ever observed. Since then, we've seen considerable improvement in the unemployment rate. And, as of August, that unemployment rate was down to 5.2%, but approximately 24% of the jobs lost in the pandemic have not yet been regained. So, it looks like things are improving. But that's not the end of the story, especially in this uniquely health-driven labor market recovery.

Mark Fleming: Yes, where has that other 24% of jobs gone? And it's so true, that there's often more to the story than the headline number. It's great to see the unemployment rate has come down to 5.2%. And that's a very good signal of a reduction in the economic hardship that we all saw on TV when we were in the midst of the early days of the pandemic. But do you know what hasn't improved in the last year?

Odeta Kushi: The share of non-institutionalized civilians of working age who are employed or actively seeking employment?

Mark Fleming: Well, that's a mouthful. Yes, otherwise known as the labor force participation rate. And why is this important? Because a labor market with low unemployment, and low labor force participation means lots of Americans aren't participating in the economy, nor are they contributing to its growth at all. Even though maybe most of those who are in the workforce have jobs, what we really want to see is a low unemployment rate, and a high participation rate. A high share of the working-age population actually working is necessary to call a labor market healthy. And right now, nearly 3 million workers are still missing from the labor force compared to pre-pandemic. You can't hire what's not supplied.

Odeta Kushi: And that's a big deal for several reasons. One of the biggest is that an increase in this participation rate will indicate that the supply of available workers has increased. A larger active workforce means more labor resources available for the production of goods and services, and therefore a higher participation rate will benefit the economic recovery. And the idea was that businesses reopening and vaccination rates increasing would bring greater opportunity to draw workers off the sidelines. But, as you mentioned, Mark, the labor force participation rate has remained stubbornly below 62% after an early summer 2020 rebound. So, what else is going on?

Mark Fleming: Well, we know that there's a mismatch between high labor demand and restrained labor supply. A survey called the "JOLTS Survey" show lots of job openings, but we can't seem to hire anybody. And we also know that job gains slowed dramatically. The report last week on August jobs data was very sad, shall we say, according to many commentators, but higher frequency data can give us more insight. The Census Household Pulse survey data from early August reveals that rising COVID infections may actually be the cause, negatively impacting people's willingness to participate in employment. According to the survey, there was an increase in the share of adults whose main reason for not working, and I have to be careful to get this right, in the last seven days was due to being sick with, caring for someone who's sick with, or concerned with getting or spreading the coronavirus.

Odeta Kushi: So, it seems the pandemic is still in the driver's seat when it comes to the labor market. Now the Delta variant’s impact was corroborated by the jobs report because, while leisure and hospitality had been the major drivers of job growth in recent months, it was actually flat in August and food service jobs fell. We also lost jobs in retail, and hotel accommodation barely increased. But, you know, consensus expectations were that the labor supply would increase in the fall, as schools reopen, more Americans become vaccinated, and the federal unemployment supplement ended. But the rise in Delta variant infections is clearly posing a threat to that expectation.

Mark Fleming: Yeah, I'm not sure about the consensus expectations, other than the direct impacts of Delta. There's early data from states that withdrew from federal unemployment programs in June that shows that there was very little impact at all on the pace of job growth. You know, losing unemployment benefits didn't bring more people off the sidelines. So, I don't think it should be a foregone conclusion that the end of supplemental unemployment benefits will lead to a big increase in the labor force participation rate. And it's not just the direct impact of COVID, that's constraining labor supply. In fact, according to that survey, the primary reason for not working in early August was actually retirement. And it's unlikely that schools reopening, more Americans becoming vaccinated and the ending of federal supplemental benefits changes that. And more corroborating evidence in the labor force participation rate for older workers, those are the ones 55 and above, has shown no improvement at all, since the worst of the pandemic-driven decline in May of 2020. The pandemic drove many older workers to make the decision to retire early, that seems to be pretty clear in the data. So, where has all that supply gone? Add retirement to the list of options. Dare I say we might look back on this as the time of "The Great Retirement?"

Odeta Kushi: It's possible but you know, the Census pulse survey data also gives us a little bit of hope. Because once you look at the primary reason for not working among the prime-age population, so that's those between 25-to-54 years old, one of the biggest reasons for not going back to work was caring for children or an elderly person. So, now with children going back to school, this data implies that we may see more prime-age workers return to work.

Mark Fleming: Odeta, the eternal optimist.

Odeta Kushi: Okay, but let's bring it back to housing. Aside from the obvious, how does the health of the labor market impact housing? There are many reasons, but let's focus on three – consumer confidence, income and mortgage rates. First, consumer confidence, given the substantial commitment and dollars at stake, consumer confidence plays a key role in the decision to buy a home. Now, a labor market recovery slowdown driven by increasing Delta infections could result in lower consumer confidence. In fact, consumer confidence fell to a six-month low in August, as worries about increasing COVID-19 infections dim the outlook for the economy.

Mark Fleming: And number two – incomes. And you would think, well, wait a second, we just talked about a labor market that wasn't doing very well and there was no participation, even though the unemployment rate was low. But remember the supply and demand imbalance because what's actually happening is an income benefit. Because of the lack of labor supply relative to demand, wages are rising very, very quickly right now. And we estimate that the monthly increase in average hourly earnings in August contributed to a half percent, which doesn't seem like a big number, but half percent month-over-month increase in household income, which, when you hold mortgage rates constant at the August levels, that means that house-buying power increased by $2,600. And, as we know from other podcast episodes, higher house-buying power is great news for prospective home buyers chasing the elusively rare home for sale.

Odeta Kushi: And finally, rates. There has been talk of the Federal Reserve starting to reverse its easy money policies later this year since the economy has been improving. Now, the Fed’s purchase of mortgage-backed securities, as we've talked in previous episodes, puts downward pressure on mortgage rates. So, it's one of the reasons that mortgage rates have been so low. But, if this deceleration of job growth continues, it may impact the timing of when the Fed slows its bond purchases, keeping rates lower for longer. So, in conclusion, the Delta variant is a headwind to labor market progress, but will ease once cases settle back down. But, the other factor holding back labor force participation, early retirement, is unlikely to come back. The labor market thus far is headed in the right direction. But, of course, risks remain, and the housing market is indirectly impacted through consumer confidence, income growth and Fed policy. Well, thank you for joining us on this episode of the REconomy podcast. Be sure to subscribe on your favorite podcast platform. You can also sign up for our blog at And if you can't wait for the next episode, please follow us on Twitter. It's @OdetaKushi for me and @MFlemingEcon for Mark. Until next time.

This transcript has been edited for clarity.