Job growth fails to explain soaring home prices

Martin Wolk • Profile • E-mail

In his first major policy address as President Bush’s chief economic adviser, former Fed Gov. Ben Bernanke devoted a few moments to discussing the current housing boom sweeping the nation.

He cautioned that “speculative behavior appears to be surfacing in some local markets,” and said lenders and banking regulators need to remain “vigilant.” But he also said sharply rising home prices are being supported by fundamental economic factors including “low mortgage rates, rising employment and incomes, a growing population, and limited supply of homes or land in some areas.”

“For example, states exhibiting higher rates of job growth also tend to have experienced greater appreciation in house prices,” he said.

Can it really be that simple? Can rising home prices be explained as a natural outcome of a growing job market?

To check on Bernanke’s assertion, I looked at state-by-state data on employment and home prices and discovered that yes, many of the states that have seen the strongest home price gains over the past year have also seen some of the best job growth, including Nevada, Florida, Arizona and Virginia. But job growth and other economic fundamentals can only go so far in explaining the surge in housing prices, especially when you take a longer-term view.

For one thing, home sales and prices have been rising steadily for five years, breaking records year after year, even throughout the recession of 2001 and the jobless recovery that followed. If home price gains now are explained by rising employment, how do we explain the gains of 2001 to 2003, when the economy lost more than 2 million jobs and the unemployment rate was rising?

Secondly, the latest price gains in the boom states seem entirely out of proportion to the relatively modest job growth figures.

Take a look at California. Over the 12 months ending March 31, California ranked No. 2 in home price growth, behind only Nevada, with a statewide average gain of more than 25 percent, according to a quarterly price index published by federal regulators.

But California added only 250,000 jobs last year — about in line with the 1.7 percent job growth rate seen in the nation as a whole. Even more interesting: From 1999 to 2004, California’s work force only grew by 2.9 percent while home prices rose 103 percent. Compare that to the boom years of 1995-2000, when the work force expanded by 17 percent yet home prices rose only 47 percent.

The same disconnect can be seen over and over again. In New Jersey, New York and Connecticut, home prices rose an average of 13 to 16 percent over the 12 months ending March 31, a bit better than the national average of 12.5 percent, a near-record rate. Yet job growth in all three states was well below average last year — New York state added only 80,000 jobs, or 1  percent of its work force.

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