Cleveland Fed researchers examine housing market slowdown; job polarization

Recent slowdown in housing market due to higher mortgage rates, cold weather, and tighter lending standards, say Cleveland Fed researchers

The housing market has improved markedly since the financial crisis. But concerns linger over the state of residential investment, which contracted in both the fourth quarter of 2013 and the first quarter of 2014.

Federal Reserve Bank of Cleveland researchers Edward Knotek II and Saeed Zaman say their statistical model points to three primary factors behind the recent slowdown in residential investment: the increase in mortgage rates since early 2013; the unusually cold winter; and a modest tightening of lending standards in the residential mortgage market.

Knotek and Zaman say the resumption of more normal weather and ongoing improvements in labor markets and the broader economy should allow for a rebound in residential investment. However, the researchers also note that the experiences of the past year highlight the strong interest rate sensitivity of the housing sector. Forecasts from their model suggest that even moderate increases in mortgage rates through the end of next year--to a level around 5½ percent, which remains low by historical standards--potentially could pose a headwind to residential investment. Put differently, the researchers say low mortgage rates are likely to be an important factor underlying ongoing recovery in the housing market and, by extension, the broader economy.

Read The Slowdown in Residential Investment and Future Prospects

Great Recession exacerbated job polarization

In 1976, occupations that involved predominantly routine tasks, such as those performed by assembly line workers, constituted almost two-thirds of aggregate employment. But by the end of 2013, their share of employment had declined to about 50 percent. Over the same period, occupations that involve predominantly abstract tasks, such as those performed by engineers, gained ground, increasing their share of employment from about 28 percent to 40 percent. While prevalent since the 1970s, this job polarization became more evident during the Great Recession, according to Federal Reserve Bank of Cleveland researchers Murat Tasci and Jessica Ice.

The researchers say routine jobs suffered the greatest loss during the recession, falling 8.2 percent, while abstract jobs decreased by only 1.0 percent. And while abstract (and manual) occupations have more than recouped the job losses they sustained during the recession, routine jobs have increased by only 4.3 percent. Moreover, while the recession led to increases in part-time employment for all three types of occupations, the increase was largest for routine occupations, say the researchers.

Read Job Polarization and the Great Recession

And be sure to watch the live webcast of our Inflation, Monetary Policy, and the Public conference on Friday, May 30. You can find the agenda here.

Speakers and panelists include: