Despite rising mortgage rates and house prices, home sales will continue to increase this year as the labor market tightens and wages grow, according to government-sponsored enterprise (GSE) Freddie Mac's U.S. Economic and Housing Market Outlook for March.
The GSE projects home sales to be up 3% this year, with new home construction increasing by almost 20% and house price appreciation moderating to an annual growth of 5%.
Despite substantial progress, the labor market remains below its potential, with unemployment stubbornly high at 6.7% and total non-farm payrolls below peak levels, says Freddie Mac. In December 2007, the employment-to-population ratio was 62.7%. In February of this year, that ratio had declined to 58.8%.
‘In order to have solid home sales in 2014, we need to see continued improvement in the labor market," notes Frank Nothaft, vice president and chief economist for the GSE.
Of the 3.9 percentage-point decline in the employment-to-population ratio, about 40% was driven by retiring baby boomers between December 2007 and February of this year, according to Freddie Mac.
In February, construction employment was 5.9 million – down 1.5 million from December 2007. In February, annual growth in wages was at 2.5% – well above consumer price inflation, Freddie reports.
"Demographic headwinds have accounted for about 40 percent of the decline in the employment-to-population ratio," Nothaft adds. "The remaining 60 percent is due largely to cyclical factors. Manufacturing and construction are the two sectors that have been slowest to recover. With increased economic growth, these two sectors should start to improve. With more jobs, wage growth should continue to accelerate, giving American households much-needed income to help sustain the emerging purchase market.’