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Wages Dipped Slightly in December: Here’s Why


Dec. 4 2020, Updated 10:50 a.m. ET

Employment and wages are key indicators for the Fed 

Aside from employment, the most important indicator of economic well-being is wages. Despite falling unemployment, one of the conundrums of the current labor market is flat real, or inflation-adjusted, wages. Over the past decade, wages have more or less kept pace with inflation, but they haven’t increased.

Before the financial crisis, much of the rise in consumption was due to asset price inflation, not wage inflation. Instead of getting big raises, people took out home equity lines of credit to fund consumption. This approach worked as long as housing prices kept rising.

However, since the bubble burst, wages have had to fund consumption, and wages have been more or less flat. In the above chart, you can see how the slope of the line changed with the Great Recession in early 2009.

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Is wage growth finally breaking out?

Average hourly earnings fell by 1 cent on a month-over-month basis in December 2015 and were up 2.5% year-over-year to $25.24. Average weekly hours were flat at 34.5. The Fed isn’t going to worry about inflation until it sees wage growth. Currently, wage growth is barely outpacing inflation.

Once inflation starts again, you’ll also see a rise in long-term rates, which you can trade via the iShares 20-year Treasury Bond ETF (TLT).

Implications for homebuilders

Historically, real estate prices have correlated closely with wage growth. That relationship began to change in the late 1990s as wages grew at the rate of inflation and real estate prices began posting double-digit gains. Recently, home prices have been rising again, but that’s due to low inventory.

If you use the median home price data from the National Association of Realtors, you find that the ratio of median home price to median income is again approaching bubble-type highs. As the Fed removes accommodation, further home price appreciation will depend on wage growth.

Virtually all homebuilders’ average sales prices have deteriorated. They’ve been content to keep a lean inventory and raise prices. That strategy seems to have been pushed as far as it can go.

Now we’re starting to see builders such as PulteGroup (PHM) and D.R. Horton (DHI) move into entry-level brands, which is more about pushing through volume than increasing prices. Toll Brothers (TOL) is focusing on the high-end urban areas, which have the strongest pricing.

Builders such as Lennar (LEN) have been reporting an increasing backlog, which bodes well for supply going forward. Investors interested in trading in the homebuilding sector could look at the S&P SPDR Homebuilders ETF (XHB) or the iShares Home Construction ETF (ITB).


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