Unemployment and Home Prices: Real Relief? - Analyst Blog

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According to the latest U.S. job report, the unemployment rate decreased to 7.6% in March from 7.7% in February with about 88,000 jobs added to the market. Although the job additions were significantly less than expected, the takeway from the report was the drop in the unemployment rate, which apparently appears positive and augurs well for the economy that is limping back to normalcy from the wounds of a deep recession.

However, a critical analysis would reveal that the dip in the unemployment was primarily attributable to 500,000 Americans dropping out of the labor force, which dragged the labor participation rate (the percentage of the population within the demographic age of 16 and over in the labor force) to a 34-year low of 63.3%.

Since reaching its zenith at 67.3% in 2000, the labor participation rate has declined over the years as discouraged and frustrated Americans left the job market only to return when conditions briefly improved. However, the gradual retirement of an aging Baby Boomer population and a recession in late 2007 has continuously pegged back the labor participation rate.

Although a smaller pool of workers looking for jobs are likely to get them easily, it restricts potential economic growth of a country and consequently is not a healthy sign for the U.S. economy.

Another outwardly positive signal in the economy has been the continuous rise in home prices as revealed by data from the S&P/Case-Shiller index. Tracking changes in the residential real estate values across the country, the S&P/Case-Shiller Home Price Indices are arguably one of the best measures for the U.S. residential housing market and are calculated monthly using a three-month moving average.

The latest data from the January report divulged that although home prices are yet to reach the pre-recession peaks, they have risen the fastest since 2006. The 10-city composite climbed 7.3% in the trailing 12-month period, while the 20-city index escalated 8.1% as all cities posted gains on a yearly basis.

A housing recovery would do wonders for the U.S. economy that was plunged into one of the worst recessions ever witnessed by the country by a subprime crisis primarily led by a housing bubble. However, a deeper analysis would suggest that the surge in housing prices was the fallout of bulk buying by institutional buyers.


With a substantial amount of dry powder, institutional buyers are making an effort to mop-up assets in distressed sales. Listed investment and capital management firm such as The Blackstone Group LP ( BX ) as well as hedge funds and private real estate investment firms like Colony Capital and GI Partners are amassing a huge portfolio of single-family homes. Blackstone has already spent over $3.5 billion for more than 16,000 single-family homes and is reportedly spending about $100 million a week to further increase the tally.

These institutional buyers largely have a profit-based approach and their investment model is based on piling a huge pool of real estate assets, which are then rented out to generate a fixed monthly income with the homes serving as collaterals. The biggest question left to ask therefore is - Would this benefit the common man and the economy as a whole? Or is this just a ploy of the rich to be super-rich?

What also remains to be seen are whether other asset management firms such as Kohlberg Kravis Roberts & Co. ( KKR ), Affiliated Managers Group Inc. ( AMG ), and AllianceBernstein Holding L.P. ( AB ), each carrying a Zacks Rank #2 (Buy), jump on the bandwagon.



ALLIANCEBERNSTN (AB): Free Stock Analysis Report

AFFIL MANAGERS (AMG): Free Stock Analysis Report

BLACKSTONE GRP (BX): Free Stock Analysis Report

KKR & CO LP (KKR): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.




This article appears in: Investing , Business , Stocks

Referenced Stocks: AB , AMG , BX , KKR

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