The labor shortage is real. But its impact on real estate will surprise you

When the coronavirus pandemic hit, many people in real estate found themselves out of work.

Leaves took place at Realogy and Redfin. Opendoor, Compass, Douglas Elliman and Realtor.com parent company Move Inc. all announced layoffs. Executives took pay cuts and overall it looked like the economy in general and real estate in particular was headed for a period of high unemployment.

And then, surprisingly, the opposite happened. By mid-2021, vaccines had arrived and businesses were reopening. Most companies that furloughed and laid off workers started hiring again, and by the end of last year the story had changed. The pandemic was no longer a story of potentially high unemployment. Instead, a labor shortage had begun.

On Friday, the US Department of Labor released its latest unemployment figures, which show the shortage continues. And that story has now become one of the most surprising yet impactful economic components of the pandemic era. It’s exacerbating inflation, slowing businesses’ ability to rebound, putting a spanner in the workings of supply chains and causing problems everywhere.

But in real estate, it also has a surprising and unexpected impact: it could stimulate demand for homes.

Unemployment is very low

Before discussing the strange and unexpected effects of the labor shortage on real estate, it is worth noting how tight the labor market is.

According to a report on the latest figures, published on Friday, the unemployment rate in the United States stood at 3.6% in May. This number remained unchanged from the previous two months, and data from the US Department of Labor shows a steady decline in the unemployment rate during the pandemic.

Credit: United States Department of Labor

These data suggest that the anecdotal cases mentioned at the beginning of this story on real estate layoffs more or less tell the story of labor in general during the pandemic: there was a sharp increase in unemployment at the very beginning of the crisis, then a but significant recovery.

To put all this into context, experts have traditionally considered an economy to have reached “full employment” when the unemployment rate is in the 4 or 5 percent range. In other words, the United States currently exceeds full employment. Hence the labor shortage.

Danielle Hale

Realtor.com Chief Economist Danielle Hale further pointed out that “the economy is now down to just 822,000 jobs or (0.5%) below the pre-pandemic record, at nationwide, she said in a statement Friday morning on the latest data.

“At the current rate of hiring, we’ll hit that milestone by August,” Hale added.

The latest figures specifically show that May saw “notable gains” in employment in sectors such as leisure and hospitality, professional and business services, transportation and warehousing.

The real estate and rental sectors saw their employment ranks rise by about 14,000 people in May, Friday’s report noted. Home builders and residential contractors added about 16,700 jobs in May.

Stimulate demand

So what does all of this have to do with real estate demand, specifically?

Although there have been anecdotal stories from brokers about the challenges of filling staff positions, Hale told Inman in a phone call that she doesn’t think the labor shortage is enough. to significantly impede the ability of the brokerage industry – which relies on large amounts of contract workers, such as agents to operate.

Instead, Hale explained, labor shortages actually drive up wages as employers compete for a limited pool of workers. If you want to hire someone, the logic is that you have to pay more than competing companies. And as wages gradually rise, people can in turn afford to spend more, especially on things like houses.

“Even though wages are not keeping up with inflation, they are increasing more than we’ve seen historically and that’s something that’s driving demand for housing,” Hale said. “I think the way this is happening in the real estate market in a more impactful way is by boosting the purchasing power of consumers.”

Hale went on to describe rising wages due to a tight labor market as a competing trend of inflation and rising rates, leading Americans to pay more and more for roofs over their heads. And while rising wages don’t necessarily win that competition, they do help offset high and rising housing costs.

“The situation would be worse if we didn’t see big increases in revenue,” Hale added.

In his statement on Friday’s latest employment data, Hale further noted that “average hourly earnings for private sector employees reached $31.95 in May, an annual gain of 5.2%.” She also reiterated that “higher incomes can help buyers cope with higher housing costs.”

Like much of what has happened during the pandemic, rising wages that fuel housing demand are a bit of a double-edged sword. On the one hand, strong demand continues to be a boon for home sellers and listings continue to appreciate, even as talk of a market shift reaches fever pitch. But on the other hand, it also means that buyers continue to face competition and rising prices in certain markets.

Either way, though, Hale’s point on demand is interesting, as it highlights the fact that the labor shortage isn’t quite impacting the real estate of the same way it hits other sectors. When labor shortages hit, say, the airline industry, airplanes literally can’t fly. But when it comes to real estate, business can sometimes reach new heights.

Slower remodeling and construction

Of course, none of this means that every part of the housing industry is off the hook right now.

Hale noted that while brokerages don’t appear to be fatally impacted by the labor shortage, the issue appears to be impacting homeowners’ ability to get their homes ready for market in a timely manner.

“It’s hard for individual homeowners to find people to do renovation projects,” she said.

Laurent Yun | Photo credit: RAN

Lawrence Yun, chief economist for the National Association of Realtors, made a similar point about the construction industry in general, which could have longer-term impacts on home affordability.

“There is a housing shortage and therefore more workers are needed in construction,” he told Inman. “To the extent that more construction workers can be hired via higher wages, the better it is for the housing market. But, if house construction is restricted due to a lack of workers, then housing inaccessibility will continue for a longer period of time.

According to Hale, the labor market for new construction is particularly tight right now, with the sector’s open employment rate – or percentage of vacancies – standing at 5.6% in April. In comparison, the open employment rate between 2000 and the start of the pandemic has generally fluctuated between 1% and 4%. This means that there are more unfilled jobs in the construction industry today than at almost any other time in the past 20 years.

Hale described that as “one of the things that’s a factor” in the housing industry right now.

We don’t know how it all ends. There is growing speculation that an economic recession is imminent. But the tight labor market could make such a turn of events look different from past downturns. Like much of what happened during the pandemic, however, the details of the near future are more uncertain than ever right now.

“The labor shortage also brings with it the prospect of a most unique economic downturn,” Yun said. “Even if there is a recession, there may not be many job cuts as companies want to retain their workers. The health of the labor market is particularly important in an environment of higher mortgage rates .

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