A cooling U.S. labor market is compounding the challenges already facing the housing sector, as prospective homebuyers contend with persistent inflation and a deteriorating employment outlook that makes saving for a purchase increasingly difficult. The strain comes on top of a multi-year affordability crisis driven by elevated home prices and a chronic nationwide shortage of available homes, which together have pushed homeownership out of reach for a growing share of would-be buyers.

The Bureau of Labor Statistics released its July jobs report on Friday, revealing that the U.S. economy unexpectedly shed 23,000 jobs for the month. Economists had anticipated a gain of approximately 80,000. The unemployment rate edged down to 4.1%, though the decline was driven by a drop in the labor force participation rate as more people exited the workforce.

"The labor market is really the underpinning of the housing market," Realtor.com Senior Economist Joel Berner said in an interview with FOX Business. "When people don't feel confident about their jobs and their income, they're not very likely to make a huge purchase like buying a home."

Berner characterized the July report as "pretty rough," pointing to the net job losses and wages growing more slowly than inflation.

"This is not a great recipe for the housing market," he said. "Not only does it affect people's confidence, but it affects how much they're able to save for their down payments."

He highlighted the decline in labor force participation and warned it could result in "slower job growth, slower wage growth, less competition from workers to get those higher wages."

"That just means more of the same of what we've been talking about — that wages will grow slower than inflation and people will struggle to save, and then struggle to buy homes," Berner added.

Prospective buyers are unlikely to see near-term relief on the affordability front. Mortgage rates have climbed in recent weeks, recently reaching their highest level in nearly a year, and are expected to hold near current levels through the end of 2026. For first-time buyers in particular, the combination of high borrowing costs and rising prices has kept the median monthly payment near record levels reached over the past year.

"In this high mortgage rate environment — mortgage rates just jumped to their highest point in the year — it's kind of a double whammy for first-time homebuyers especially," Berner said. "They're not able to save as much for a down payment, and then when they go to buy a home, they have to finance more of their purchase at higher rates, so the affordability squeeze is really coming from all angles."

Berner noted that the Federal Reserve appears more inclined to raise interest rates than cut them, given persistent inflation, even as the labor market softens. The July jobs data sharpens the tension between the Fed's dual mandate of stable prices and maximum employment, as signs of labor weakness complicate the case for further tightening. Federal Reserve official Hammack recently indicated that multiple rate hikes may be necessary to bring inflation under control.

"I think the mortgage rate environment that we're currently living in is about where we'll be for the remainder of the year," Berner said, adding that the softness in the housing market is likely to persist.

"We're really seeing a slowdown in terms of listing prices this year, a little bit higher sales activity than last year, because buyers and sellers are kind of meeting in the middle at a better pace than they were in the last couple of years," he observed.

However, Berner cautioned that the high mortgage rate environment signals continued tepid demand from potential buyers, which could lead to further price declines and fewer new listings.

"Sellers are looking around saying, 'I don't know if I can sell my home for a price that I want,' and just deciding to forego doing that," he said.

Source: Fox Business