A Downshift In Job Growth Is A Moment To Up The Ante On People

Homebuilding capability, a classic economic feedback loop, has been a key supply constraint factor all along since the GFC.

True to vicious circle character, the talent, skills, worker, and capability constraint, is ...

A reinforcing process: when a change in one quantity causes changes to others that eventually lead to a further change in the original quantity."

Consider the mid-2020s a crossroads where a crisis in capability can only get better or worse – in a negative feedback loop – for homebuilding writ large, as well as for the sector's individual corporate players.

Investing in it now – wisely, precisely, and aggressively – will ward off risk and ignite opportunity just as materially as today's land investments will drive new levels of scale and growth.

In an eventful first-half decade of the 2020s – whose timing coincides with strong, demographically-powered counter forces of demand – negatively reinforcing human construction capability has added fragility to the homebuilders' business outlook and optionality even as it poses as a cost and risk mitigator in today's turbulent and volatile operating conditions.

Even in an iffy, mixed-signals economic backdrop, homebuilding's biggest urgencies of the moment relate to people, talent, human collaboration, and adaptivity. Pay attention to getting people right, as companies and as a sector, and businesses will be more capable to withstand and thrive under any number of challenges.

Let's look at today's news from the Bureau of Labor Statistics, whose headline data come across as a wish-come-true report.

Today's employment report should ease fears that the job market is reaccelerating — while offering reassurance that it's still healthy, with few signs the economy is in trouble." - Axios

More apropos of homebuilders, Wolfe Research homebuilding and building products equity research chief Truman Patterson writes:

We believe this is a Goldilocks employment report as job growth moderated but remained at a healthy level (2.1M annualized), wages decelerated and the 10-year rate is down 9 bps this morning. Aptly, we expect the housing equities outperform the market today. Further, while job growth decelerated in April to its lowest pace in five months, the 242K T3M average continues exceeding 2023’s average 231K monthly pace."

Although the April 2024 employment report notes that construction employment rose by 9,000 new payroll positions (1,100 residential jobs) this past month, an overall hiring downshift – the slowest monthly gain in 13 months – and a big drop in construction job openings suggest that we should examine what's going on economically, what it means, and what homebuilding business leadership responses should be considered.

A single month's data – full of noise and prone to revision – falls far short of proving a trend. It's also important to stress that a relatively strong employment report suggests that demand will continue to build from where it is now. Wolfe Research's Patterson qualifies that, however, by emphasizing that broad payroll expansion accomplishes only part of the job. Wage increases – to offset higher and higher home prices and higher for longer interest rates – serve an equally important role in narrowing a gaping affordability gap for would-be buyers.

Total Private Wages (jobs x weekly earnings) were up +26.1% versus pre-pandemic levels in April. That said, wages have failed to keep up with ~40%+ home price appreciation post-pandemic and higher mortgage rates, indicating there’s further wood to chop before affordability returns to normalized levels, which could be solved through a combination of increased wages, home price stabilization or lower rates—in the homebuilders’ case, mortgage rate buydowns."

Lower rates – if a Goldilocks scenario does in fact play out and give the Fed reason to begin its funds rate decreases later this year – will help.

Home price stabilization is another matter, at least partly constrained by homebuilding's human capability crisis.

Two related points National Association of Home Builders chief economist Rob Dietz raised in earlier economic and job openings reports this week.

Commenting on the Fed's decision to hold fast on its current funds rate target, Dietz writes:

Overall, the central bank continues to look for lower inflation readings, with the data having shown limited progress in recent months. An important reason for the lack of inflation reduction remains elevated measures of shelter inflation, which can only be tamed in the long-run by increases in housing supply. Ironically, higher interest rates are preventing more construction by increasing the cost and limiting the availability of builder and developer loans necessary to construct new housing."

He goes on to say:

With more than half of the overall gains for consumer inflation due to shelter over the last year, increasing attainable housing supply is a key anti-inflationary strategy, one that is complicated by higher short-term rates, which increase builder financing costs and hinder home construction activity."

On the construction capability side of the equation, the NAHB chief economist notes:

While the Fed intends for higher interest rates to have an impact on the demand-side of the economy, the ultimate solution for the labor shortage will not be found by slowing worker demand, but by recruiting, training and retaining skilled workers. This is where the risk of a monetary policy mistake had some risk of arising. Good news for the labor market does not automatically imply bad news for inflation."

In other words, Dietz is saying, more – not less – human capability in construction now would stand to empower new-home production and bring shelter inflation down faster.

This, of course, is a Fed policy priority as it continues to work to pull of its no-landing post-pandemic landing with a triumph over inflation and a structurally sound economy.

It suggests as well that homebuilding organizations – as integral employers in homebuilding's capability feedback loop – have some of "the wood to chop before affordability returns" as well.