Employment: MARCH 2019

Low Unemployment Fuels Housing Demand, Favors Apartments

Tight labor market curbs job creation. The U.S. economy added 20,000 jobs in February, the lowest monthly total since September 2017. While the partial government shutdown and winter storms contributed to last month’s meager showing, the pace of hiring should recover in March. Still, the very tight unemployment rate will likely limit 2019 job creation to the low-2 million range. The total number of unemployed people now stands at 6.2 million, well below the 7.3 million current job openings. With qualified candidates hard to find, employers are facing significant recruiting challenges.

Declining underemployment supporting apartment demand. The tight labor market is helping those who have had a difficult time finding a job in the past attain new opportunities. This is reflected in an 80-basis-point drop in the broad-based underemployment rate, the largest single-month decline in the measure’s history. The rate accounts for people who are normally excluded from the standard unemployment rate, such as discouraged individuals who have not looked for work in recent months and part-time employees seeking full-time positions. As more of these workers find full-time employment, new households will form, boosting demand for apartments. Class C units, in particular, will benefit as they offer inexpensive housing options. While Class C monthly rates have appreciated 33 percent over the past 10 years, Class A and B rents rose by greater margins. The gap between the average Class C effective rent and Class A or B rent is wider now than it was a decade ago. This could direct more potential renters toward that option, reducing availability. The Class C vacancy rate fell to 4.1 percent at the end of 2018, its lowest level since 2000 and 50 to 100 basis points below comparable measures for Class A and B units. In general, the unemployment rate and the Class C vacancy rate have tended to move together over time. This poses a risk for investors should the economy lose substantial momentum.

Developing Trends
Government shutdown distorts joblessness. Despite limited hiring, the total number of unemployed fell by 300,000 in February. About 225,000 people were temporarily laid off from work in January, including government employees furloughed by the shutdown. The return to full federal operations brings the unemployment rate closer to what it may have been in January without the shutdown.

Contained inflation grants Fed maneuvering room. Another byproduct of the tough hiring conditions are rising wages. Average hourly earnings improved 3.4 percent over the past year, the fastest pace since April 2009. Greater take-home pay, however, has not sparked increased price inflation, granting the Federal Reserve more latitude in their management of economic growth. The Fed will maintain a data-driven approach to monetary policy this year as it considers a range of tools to use if needed.