Weak Job Market Leads to Weak Housing Sector

Jobs and real estate: the two go hand in hand. Without a job, it is nearly impossible to pay for a home. It is no wonder during a week when so many are focused on today's employment report, the nation's real estate sector is on the hot seat.

As vital as today's 9.5% unemployment figure is, to get the entire picture, we have to take a look at how the real estate market is faring. Have we hit the bottom or will the largest asset in most Americans' portfolio continue to depreciate? The data this week allows investors to argue either position.

Yesterday's report out of the National Association of Realtors was far from appealing, showing May's pending sales figures plunged by 30% versus the prior month – to the lowest level since 2001.

With the end of the federal government's homebuyer's credit in April, few investors were expecting anything resembling a rise in prices. After all, why would a buyer wait until May to make a move when he could have lined his pocket with several thousand dollars worth of Uncle Sam's money in April? Unfortunately, the amount of the monthly drop caught some investors by surprise.

"We are once again struck by the force of the drop," said Dan Greenhaus, an economist with Miller Tabak. "There is simply no other way to spin the recent housing data as anything other than significantly worse than virtually anyone, including the housing bears – a group in which we find ourselves – envisioned."

Optimistic investors are hopeful May's stronger-than-expected drop will mean future numbers will show May's lack-of-stimulus plunge was the bottom of the decline. With interest rates reaching levels never before seen, discount mortgages are certainly working in the bulls' corner.

"Interest rates on fixed-rate mortgages and the five-year hybrid ARM fell once again to all-time record lows this week in a period where the economy struggles to gain momentum and inflation remains very low," said Freddie Mac's chief economist, Frank Nothaft.

Nothaft referred to the ultra-low 4.58% average rate on a 30-year fixed mortgage his agency recorded this week. A year ago, the going rate was 5.32% on the same loan. While the drop in rates is appetizing for on-the-fence homebuyers, it is important to note the difference on the two monthly mortgage bills (one at a 4.58% rate, the other at 5.32%) on a $200,000 home is less than a hundred dollars – hardly enough to convince cash-strapped buyers to make a move.

Unfortunately, today's weaker-than-expected jobs report shows private-sector employers remain cautious about adding to their payrolls. Until we see a sustained level of hiring, we cannot reasonably expect real estate prices to rise.

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