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Job Growth Strengthens in October Although Interest Rates Expected to Rise a Full Point

The mature housing market will force investors to analyze neighborhood fundamentals

Hovland_Steve

By Steve Hovland, Director of Research
HomeUnion

Nonfarm payrolls bounced back in October as thousands of employees that were technically unemployed during the September survey period returned to work. In all, 261,000 new jobs were added last month. Unsurprisingly, the BLS underreported August jobs by 39,000 spots, a trend that has often impacted Fed decisions during September. It’s unlikely, however, that the Federal Open Market Committee (FOMC) would have voted to raise rates under any circumstances due to the situation with hurricanes Harvey and Irma. Revisions also added 51,000 jobs back to September payrolls, tipping the headline figure back into positive territory. The economy’s streak of adding new jobs is now at 85 months, with the last cuts occurring in the fall of 2010 as temporary census workers were removed from payrolls.

President Trump’s decision to nominate Jerome Powell rather than ask Chairwoman Yellen to serve another term could create some short-term ambiguity for interest rates. The markets are unlikely to react strongly though, due to the consistent voting patterns among the two FOMC members. We expect interest rates to continue to rise along the current trajectory, including three hikes in 2018. Although unlikely, the Fed could tap the brake in December to let incoming Fed Chairman Powell resume rate hikes. Nonetheless, we still anticipate a December rate hike, along with March, June and December hikes in 2018.

In terms of the real estate investment market, the implications of October’s job report and a shift in leadership at the FOMC are relatively clear. The slow trajectory of rate hikes and draw down of the Fed’s balance sheet will continue unabated. Rising rates, along with higher home prices, are making it more challenging to locate single-family rental properties. During the initial stages of the housing recovery, nearly every location would be successful. In today’s mature housing market, investors need to dive into neighborhood fundamentals to identify investments that will pan out financially.

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