The Impact of September 2023 Job Growth on Residential Real Estate Investors
Invest when others are fearful
Job growth is one of the most important indicators of the health and direction of the economy. It affects consumer spending, business confidence, inflation, interest rates, and the demand and supply of housing.
For real estate investors, especially those of us who focus on residential properties, job growth can have a significant impact on our potential for passive income, increases in rents, and the outlook for buying more properties that generate good cash flow in a high-interest rate, high inflation environment.
In this article, we will examine the latest job growth numbers from September 2023, their implications for the economy and the real estate market, and how residential real estate investors, including the members of our Ideal Wealth grower community, can position themselves to take advantage of the opportunities and challenges that lie ahead.
September 2023 Job Growth Numbers
According to the latest report from the Bureau of Labor Statistics (BLS), the US economy added 336,000 jobs in September 2023, beating analysts’ expectations of 300,000.
The unemployment rate fell to 3.8%, the lowest level since March 2020, before the pandemic hit. I never really understand how it is calculated. Each month in each report there have been more or less new jobs created but no months and no new jobs.
One would think there are only so many people looking for jobs and so many jobs available. Even if a few new jobs are created each month and a few traditional jobs go away, an increase by more than 300000 jobs should lower the rate, but it had been, according to the government, as low as 3.4% earlier this year. Maybe someone can explain to me how this works.
It reminds me — again — about the saying my grandpa drilled into me:
“Don’t ever trust a statistic or government number that you did not manipulate yourself!”
I don’t but what is being reported can be used to identify trends and explain impacts and changes in markets we observe.
The labor force participation rate also increased slightly to 61.8%, indicating that more people are looking for work or working.
How wonderful would it be if they were to report this in nominal numbers? If they were to say that out of the theoretically 260 million people who could be working as part of the US population, 161 million are as of September 2023 and that the number was closer to 160 million in previous months.
That would explain how we can have 336000 new jobs, but the unemployment rate is higher than it had been.
The job gains were broad-based across sectors, with notable increases in leisure and hospitality (+74,000), professional and business services (+60,000), education and health services (+54,000), and construction (+31,000). The average hourly earnings rose by 0.4% month-over-month and 4.6% year-over-year, reflecting the tight labor market and rising inflation pressures.
The September 2023 job report was widely seen as a positive sign of the economic recovery from the pandemic-induced recession.
However, it also raised some concerns about the potential impact of higher inflation and interest rates on growth and consumer spending.
Impact on the Economy and the Real Estate Market
The strong job growth numbers in September 2023 confirmed that the US economy is on a solid footing, despite the challenges posed by the Delta variant of COVID-19, supply chain disruptions, labor shortages, and geopolitical tensions.
The robust labor market supports consumer confidence and spending, which account for about 70% of GDP.
It also boosts tax revenues for federal, state, and local governments, which can help fund infrastructure spending and social programs.
However, the strong job growth also has some negative consequences for the economy and the real estate market.
First, it fuels inflation expectations, which are already running high due to rising commodity prices, supply chain bottlenecks, and pent-up demand.
The consumer price index (CPI) rose by 5.4% year-over-year in September 2023, the highest level since 1990.
The core CPI, which excludes food and energy prices, rose by 4% year-over-year, the highest level since 1991.
Second, it puts pressure on the Federal Reserve to tighten its monetary policy sooner than expected.
The Fed has been keeping its benchmark interest rate near zero since March 2020 and buying $120 billion worth of Treasury and mortgage-backed securities per month to support the economy and the financial markets.
However, as the economy recovers and inflation heats up, the Fed is expected to start tapering its asset purchases by November 2023 and raise its interest rate by mid-2024.
Higher inflation and interest rates have several implications for the real estate market.
On one hand, they increase the cost of borrowing for homebuyers and investors, which can dampen demand and affordability.
On the other hand, they increase the value of real assets that can hedge against inflation and provide stable income streams.
Moreover, they create a more favorable environment for rental properties than for owner-occupied properties.
Impact on Residential Real Estate Investors
For residential real estate investors like us who focus on rental properties that generate positive cash flow, job growth can be a boon or a bane depending on how they adapt to the changing market conditions.
On the positive side, job growth increases the demand for housing as more people have income to afford rent or buy a home.
It also increases the income potential for landlords as rents rise along with wages and inflation.
According to Zillow’s rent index (ZRI), rents increased by 11.5% year-over-year in September 2023, the fastest pace on record since 2015.
On the negative side, job growth increases the competition for housing as more people enter or re-enter the market.
That’s a theoretical perspective. In 2023 fewer and fewer people qualify for mortgages, so the fact that they might get a few percentage points more in wages is compensated by the much higher increase in interest rates and the associated monthly cost for mortgage payments that result.
It also increases the cost of financing for investors who rely on debt to acquire or refinance properties. For us investors that is almost always the case as we can preserve cash for additional investment of short-term use, and rather have properties financed, even though interest rates are high.
The beauty of the US financial system allows us to suffer through the high costs now and accumulate an ever-larger portfolio. When the FED inevitably has to bring interest rates back down in 3–4 years, we will refi and massively increase cash flow in these properties. Would we wait till the environment is more affordable, all the people who would like to buy a house now and will jump to the opportunity as soon as affordability returns will again be in competition with us investors.
Right now, we have most of the market to ourselves and can search to find those properties that are well-performing even with the current numbers in place.
Just imagine how amazing they will perform when rates go down, we refinance, and cash flow is jumping.
What a wonderful picture worth aiming for with performance-oriented investments now.
According to Freddie Mac’s primary mortgage market survey (PMMS), the average interest rate for a 30-year fixed-rate mortgage rose to 4.12% in September 2023, the highest level since February 2021.
Primary mortgages are calculated by adding about 2.5% — 3% to that value as the primary number is what lenders and banks pay for the money. To generate profit, they add the step-up. That means mortgages for owner-occupants are about 7%.
As investors we have to add 1% because we don’t live in the properties (don’t ask me why the banks think it is fair to charge us more), so we end up close to 8% for our mortgages. In the last few days, I have seen a few offers for 7.75%
Given these pros and cons of job growth for residential real estate investors, how can we position ourselves to take advantage of the opportunities and challenges that lie ahead?
Here are some strategies to consider:
- Focus on markets with strong job growth, low unemployment, high affordability, and low vacancy rates.
These markets tend to have higher demand and a lower supply of housing, which can support higher rents and property values.
Some examples of such markets are Austin, TX; Boise, ID; Charlotte, NC; Nashville, TN; and Phoenix, AZ and plenty of locations in Ohio.
- Focus on properties with positive cash flow, low maintenance costs, and high occupancy rates.
These properties tend to be more resilient to market fluctuations and provide stable income streams. They also tend to appreciate faster than properties with negative cash flow, high maintenance costs, and low occupancy rates. It would be great if they are Built-to-rent properties, but it is hard to find good ones in the right locations.
- Focus on properties that cater to the needs and preferences of the post-pandemic workforce.
These properties tend to have features such as flexible floor plans, home offices, outdoor spaces, smart technology, energy efficiency, and proximity to amenities. They also tend to attract more tenants and command higher rents than properties that lack these features.
- Diversify your portfolio across different property types, locations, and income levels.
This can help reduce your risk exposure and increase your return potential. For example, you can invest in single-family homes, multifamily apartments, mobile homes, or short-term rentals in different markets and neighborhoods that serve different segments of the population.
- Use creative financing strategies to acquire new properties without relying on traditional lenders.
These strategies include seller financing, lease options, subject-to-deals, private money loans, hard money loans, crowdfunding platforms, or self-directed IRAs.
These strategies can help you overcome the challenges of qualifying for loans or finding deals in a competitive market.
We have actually developed new relationships with lenders that allow us to take advantage of these creative approaches. Most importantly they help us to grow our portfolio faster than usual because we have lower down payments than traditional mortgages.
If you think about it, this new approach allows you to grow your portfolio twice as fast as normal. We still make sure that each property generates some cash flow, so we are not paying anything out of pocket.
This performance aspect guides the selection of our investments. Still getting into a $250K duplex as an investor and paying less than a $20k down payment is a beautiful thing, if there is cash flowing from day one.
I admit finding these kinds of properties is hard, but it is possible.
I can help you if you are interested in learning more. Book a call and we can talk about it.
Conclusion
Job growth is a double-edged sword for residential real estate investors.
It can create opportunities for higher income and appreciation but also challenges for higher costs and competition.
To succeed in a high job growth environment, investors need to be flexible, adaptable, and strategic in their approach.
They need to focus on markets and properties that offer the best prospects for cash flow and value creation while diversifying their portfolio and using creative financing strategies to leverage their capital.
That’s exactly the reason why trying to take all these aspects into consideration on your own, especially if you are not very experienced, is almost impossible.
I would love for you to join our community and invest together with us, so you have access to the deals and avoid mistakes.
The times are challenging for sure, but anybody who is willing to take action based on solid research and emotionless evaluation of the numbers will create a portfolio that people in 5, 10, 15 years will marvel at.
Think of how many folks in the industry now wish they had grown their portfolio during the last financial crisis.
Now we have another opportunity. Keep in mind: Grow and invest when the market is fearful and stagnant and enjoy the fruits when the market is jubilant.
It’s clearly fearful and negative now, so it’s time for us to add assets.
