2020’s rebounding jobs market masks deeper troubles for real estate in 2021

Jobs are the single most important economic factor in real estate. Without a paycheck or some form of passive income, tenants cannot pay rent, let alone save up to become homebuyers, and homeowners cannot pay their mortgages. For commercial real estate, fewer jobs denote less need for commercial space, including office, retail and restaurant space.

Therefore, the historic job losses that took place in 2020 immediately sounded alarm bells for real estate professionals. In California, 2.7 million jobs — over 15% — were lost from the December 2019 peak in jobs to the bottom in April 2020. As of November 2020, jobs have rebounded somewhat but are still 1.35 million or 7.6% below the pre-recession peak.

Long-term unemployment rises

While the total share of unemployed individuals continues to drop, more troubling trends are taking shape in the jobs market.

The long-term unemployment rate, or the share of unemployed workers who have been out of work and searching for a job for 27 weeks or more, has quickly escalated. Prior to the recession, the U.S. long-term unemployment rate stood around 20%. In other words, 80% of unemployed workers were able to find jobs (or exit the labor force) in six months or less. As of November 2020, the long-term unemployment rate is 37% and rising rapidly, according to the Bureau of Labor Statistics (BLS).

Still others have simply left the labor force, evidenced by the falling labor force participation (LFP) rate. Before the 2020 recession, the share of California’s population that was employed or actively seeking employment stood at 63.4%. This LFP rate has dropped to 61.5% as of November 2020, representing roughly 800,000 individuals who have dropped out of the labor force and are now living off of savings or the generosity of family and friends, indefinitely.

Further, of those who have regained employment, many have seen their hours and incomes reduced. Others find themselves paying back months of accumulated debt and housing payments racked up during their unemployment, the result of forbearance plans and eviction moratoriums.

While, at first glance, the housing market has escaped the worst effects of 2020’s job losses, a deeper study is needed. True, home prices continue to rise, 8%-10% above a year earlier in California as of September 2020. But these price rises have been supported not by increasing homebuyer incomes, but primarily by decreasing interest rates. Further, now that interest rates are at their historic bottom, they will not go much lower, if at all.

As we head into 2021, the foreclosure moratoriums are winding to a close and the economy is entering a second decline. Thus, don’t expect home prices to maintain their tenuous growth. firsttuesday forecasts home prices to decline in the next couple of years, bottoming in 2023.

One possible intervention that may save housing from its likely decline is more job creation, an effort not addressed by the recently-passed second stimulus program. Only a return of jobs will provide the support needed to sustain real estate after 2020’s major job losses.