[Reuters Analysis] US economy braces for twin housing, labor market headwinds: McGeever

By Jamie McGeever

ORLANDO, Florida, Sept 15 (Reuters) - The U.S. labor market appears to be deteriorating rapidly just as the country's housing market is also creaking, two negative forces that risk feeding off each other and smothering economic growth.

On the labor side, the latest sweep of data shows why the Federal Reserve is almost certain to resume its interest rate-cutting cycle this week - the unemployment rate and weekly jobless claims are both the highest since 2021, and unemployed people now outnumber available jobs for the first time in four years.

Meanwhile, pressure in the housing market remains elevated. Average monthly mortgage payments are nearly double pre-pandemic levels, and overall affordability is near record lows. Treasury Secretary Scott Bessent said earlier this month that the government may soon declare a national housing emergency.

He has reason to be worried. High mortgage rates and soaring rents can weigh on consumer spending, leading to lower corporate profits, and ultimately less hiring and more firing. Rising unemployment, of course, puts further downward pressure on spending, creating a vicious negative spiral.

Adding to these worries is the fact that many homeowners can't move even if they want to, as they are locked into ultra-low mortgage rates secured in the aftermath of the pandemic. As a result, mobility is falling, just when the labor market needs a more flexible and dynamic workforce. In other words, at exactly the wrong time.

DECLINING MOBILITY

High mortgage rates and soaring rents are exacerbating a long-standing U.S. housing crisis. The country currently has a record 4.7 million fewer units than it needs, according to realtor Zillow.

That's bad news for the economy – long lauded for its flexibility – because a lack of affordable housing limits labor mobility. That, in turn, can fuel higher unemployment in certain regions and make it hard for businesses in thriving regions to fill positions.

Limited access to housing "directly impacts the efficiency and flexibility of the labor market," says Shelley Stewart III, a senior partner at McKinsey. "Addressing housing affordability can alleviate these imbalances, leading to a more dynamic and balanced labor market."

Indeed, according to academic research cited in a Bipartisan Policy Center report last year, if three of the country's 'productive job markets' – New York City, San Francisco, and San Jose - had adequate housing in the 45 years between 1964 and 2009, the U.S. economy would be 3.7% bigger. Failure to improve housing affordability damages U.S. economic growth over the long term, not just this cycle.

WHAT TO DO?

It's not all gloom and doom, though.

First, technology could help maintain some labor mobility despite the housing crunch. The number of households with flexibility to work remotely and thus live further away from the office tripled between 2019 and 2021, the Bipartisan Policy Center study found. This may partially explain the increased migration in recent years of households to the South and Mountain West from the Northeast and Midwest.

But work-from-home policies can only do so much. Consider that the overall rate of movement within the U.S. was less than 9% in 2022, compared with an annual average of almost 20% between 1948 and 1980.

Next, there are some signs that the housing squeeze may be easing. The recent decline in long-term U.S. government bond yields has brought average 30-year mortgage rates to an 11-month low of 6.35%, while rising inventory and sluggish demand are capping house prices.

But Americans seem unconvinced. Nearly 70% report being concerned about the rising cost of housing, an increase of eight percentage points from a year earlier, according to a McKinsey study. That negative sentiment could chill consumer spending regardless of the facts on the ground, especially when coupled with intensifying job fears.

So what else can be done?

Building new homes is the obvious answer. Investment in the housing sector has a strong multiplier effect on economic growth and tax revenues. McKinsey estimates that investing to close the housing shortfall could create up to 1.7 million jobs and add nearly $2 trillion in cumulative GDP through 2035.

But investment on that scale will be hard to execute, especially when conditions in the sector are so fragile. And it will take time.

In the short term, therefore, the economy can't bank on a housing renaissance. A more realistic hope may be that monetary easing, fiscal largesse and the Trump administration's deregulation drive will provide enough of a tailwind to offset these two rather powerful headwinds.

(The opinions expressed here are those of the author, a columnist for Reuters)

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