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How weak job participation rips the housing recovery

The December jobs report speaks volumes about why the housing recovery is not as robust as it should be, given still historically low mortgage rates and still relatively low home prices. Specifically, the weak job participation rate, falling to the lowest level since 1978, according to the U.S. Bureau of Labor Statistics, explains why so many are barred from home ownership and why others in trouble on their mortgages are unable to save their homes.

More young adults are going back to work, with employment rising from below 75 percent earlier last year to just above it in December. Still, the number is well below where it should be. Wage growth also came in at just 1.8 percent for all of 2013, below the inflation rate, according to the BLS.

"Millennials have a long road ahead: The employment rate of 75.4 percent in December was closer to the low point during the recession, 73-74 percent, than to the pre-bubble normal, 78-80 percent," noted Jed Kolko, chief economist at Trulia.

First-time home buyers have been largely left out of today's housing recovery, especially given tight mortgage credit. They simply don't have the down payments or the credit scores necessary to qualify. This as new mortgage rules go into effect today that some say will institutionalize tight credit. These rules are designed to protect borrowers by ensuring that they can repay their loans, but some claim the rules are far too stringent.

"A healthy mortgage market includes a certain amount of foreclosures for reasons other than medical, job loss or divorce," said Jaret Seiberg of Guggenheim Partners in a note to investors. "Otherwise credit-worthy borrowers will be denied the ability to own homes."

(Read more: Breaking and entering: Housing's big business)

The weak job participation rate also provides an answer to what seems at face-value like a puzzling phenomenon: The number of homes in the foreclosure process that actually have positive equity has jumped dramatically in the last year, but the homes are still being lost.

At the end of 2013, 31 percent of all residential properties in foreclosure had some positive equity, according to a new report from RealtyTrac, an online foreclosure sales and data company. That is up from 24 percent just three months before. The gain is due to fast-rising home values.

Homes in foreclosure that do have equity, have on average about 27 percent equity, which is enough to qualify for a refinance that could offer a lower monthly payment. That amount of equity could also allow these borrowers to sell without any hit to their credit, such as happens during a short sale.

"Whether many of these homeowners want to take advantage of these options, or know that they have these options, is less clear, especially given the fact that so many have not yet done so," added ReatyTrac's Daren Blomquist.

So-called "cure rates," or the rate at which a home in the foreclosure process is saved from final bank repossession, either through a loan modification, short sale or payment, have not moved dramatically. In fact, just 1.45 percent of all loans in the foreclosure process cured between September and November of 2013, according to Black Knight Financial Services (formerly Lender Processing Services). That is up from 1.17 percent the year before, but still far lower than the equity gain numbers might predict.

(Read more: New mortgage rules: No traps, no runarounds)

Job seekers meet with recruiters at the Columbus Career Fair in Columbus, Ohio.
Ty Wright | Bloomberg | Getty Images
Job seekers meet with recruiters at the Columbus Career Fair in Columbus, Ohio.

Why? The trouble is, in order to qualify for a refinance or loan modification, the borrower needs to have a job. There are also thousands of borrowers who have not made a mortgage payment in well over a year. Just because their home suddenly has equity on paper does not mean they can make up all those missed mortgage payments.

The only bright side from the weak December jobs report is that could push mortgage rates lower temporarily, as investors rush to the safety of treasury bonds. Mortgage rates loosely follow the yield on the ten-year bond.

(Read more: Mortgage refinances bounce back as rates settle)

"Even though today may get us an eighth lower, I don't think this data, alone, is enough to set a new trend in motion," noted Matthew Graham, chief operating officer of Mortgage News Daily. "The biggest questions will be whether it changes anything about the pace of tapering and whether it's confirmed in the next report."

The Federal Reserve has already cut back its mortgage-bond buying, and the expectation has been that it will cut back even more as the economy recovers. Weaker employment could delay that cutback and keep rates lower longer than expected.

By CNBC's Diana Olick. Follow her on Twitter @Diana_Olick.

Questions?Comments? facebook.com/DianaOlickCNBC

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  • Diana Olick serves as CNBC's real estate correspondent as well as the editor of the Realty Check section on CNBC.com.

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