Americans Buying Fewer Homes, Services

Americans are buying fewer houses even as interest rates fall, and demanding fewer services even as job gains strengthen.  The dynamic between lower demand for homes and services and lower interest rates and more job gains is confounding economists, who expect a lock-step progression in which higher demand results in gains in both services and jobs. Yet the data is significantly more mixed.

Americans are buying fewer houses even as interest rates fall, and demanding fewer services even as job gains strengthen.  The dynamic between lower demand for homes and services and lower interest rates and more job gains is confounding economists, who expect a lock-step progression in which higher demand results in gains in both services and jobs. Yet the data is significantly more mixed.

According to private payroll services firm ADP, an impressive 205,000 jobs were added to the U.S. economy in January, far above the 190,000 expected. The majority of those jobs were in the service sector, which added 192,000 jobs.  “Job growth remains strong despite the turmoil in the global economy and financial markets. Manufacturers and energy companies are reducing payrolls, but job gains across all other industries remain robust. The U.S. economy remains on track to return to full employment by mid-year,” said Moody’s Analytics Chief Economist, Mark Zandi.

Despite the gains, service growth is disappointing, with the PMI Services Index falling to 53.2 from 54.3 in December, showing weak expansion of services, according to Markit Economics. The fall in the index also meant that January 2016 marked “the weakest pace of activity growth since the current period of expansion began in late-2013.”

The decline in services demand combined with strong growth in the labor market within the services sector may indicate a growing disconnect between actual and perceived demand. This could result in a drop-off in jobs in the service industry, unless demand picks up from consumers in the short term.

However, ADP Research Institute Head Ahu Yildirmaz notes that large firms are lowering their employment plans, which may be a sign that they expect a weaker demand than small and medium-sized businesses. “These businesses are more sensitive to current economic conditions than small and mid-sized companies,” Ylidirmaz said.

Weak Mortgage Activity

In addition to weak demand for services, Americans are less eager to take on a mortgage, even as mortgage rates fell to less than 4% last week, according to a new report by the Mortgage Bankers Association (MBA).

The MBA Purchase index fell 7% after rising 5% last week, while the refinance index barely rose at all—just 0.3% after an 11% increase last week. The deceleration in refinance activity and the fall in purchasing activity despite falling rates are unusual; typically, homeowners and homebuyers will become more aggressive about purchasing or refinancing property as rates go down, as monthly payments become more affordable.

Some analysts have expected a slowdown in mortgage activity despite lower mortgage rates as a combined result of exhaustive increases in real estate prices and flat or low-growing wages for most Americans. Even as mortgages become affordable, homes are not, and so it is pricing more Americans out of purchasing in the first place.  Lower-priced down payments, which have become more popular across the country as banks lower lending standards, have not encouraged more Americans into the housing market.

Some analysts are cautioning that the combined decline in services demand and weaker housing activity may be signs that the slower GDP growth in the fourth quarter of 2015 may be just a harbinger for weaker, or negative, growth in the coming months.