Will Younger Generation Rescue Real Estate?

The Mortgage Corner

Privately-owned housing starts in November were at a seasonally adjusted annual rate of 685,000, which combined with increasing builder sentiment is a sign that children of the baby boomers—the so-called Boomerang or echo boomer generation—may finally be venturing out from their parents’ homestead. This is 9.3 percent above the revised October estimate of 627,000 and is 24.3 percent above the November 2010 rate of 551,000.

Household formation is the big uncertainty. It hit record lows during the Great Recession, as the offspring of baby boomers stayed at home longer, rather than buy or rent their own living space. But population pressures are building as the echo boomers outnumber their parents—some 86 million who will eventually live separately.

U.S. home prices won’t recover until the economy improves enough to boost the number of households and clear an oversupply of properties, said economist Karl Case, co-founder of the S&P/Case-Shiller home price index.

“Normally, the way we’ve cleared the market is we’ve had more household formation,” Case, a retired Wellesley College professor, said in an interview today with Tom Keene and Ken Prewitt on Bloomberg Radio’s “Surveillance.” Lackluster economic growth has encouraged people to move in with friends or family, meaning “demand is not going anywhere,” he said.

The number of U.S. households, a key determinant in home sales, grew by 600,000 this year, less than half the 1.5 million pace of 2006, when prices reached a record, according to IHS Global Insight Inc. This year’s pace isn’t enough to absorb the so-called shadow inventory of distressed properties poised to come on the market, said Patrick Newport, an economist with the Lexington, Massachusetts-based research firm.

Whereas something like 750,000 and 1 million new households were predicted in 2011, predicts UBS Securities LLC’s Maury Harris and IHS Global Insight’s Patrick Newport, according to a recent Bloomberg article. That compares with just 357,000 added in the year ended March 2010, the lowest on record, according to the Census Bureau. As employment picks up, new households are likely to rise above the past decade’s average of 1.3 million a year, according to Newport.

Most of the increase this year has been for multi-family starts, but single family starts are increasing too. Single-family housing starts in November were at a rate of 447,000; this is 2.3 percent above the revised October figure of 437,000. The November rate for units in buildings with five units or more was 230,000.

Graph: Calculated Risk

Builder confidence in the market for newly built, single-family homes also edged up two points from a downwardly revised number to 21 on the National Association of Home Builders/Wells Fargo Housing Market Index (HMI) for December, just released. This marks a third consecutive month in which builder confidence has improved, and brings the index to its highest point since May of 2010, said Calculated Risk.

“This is the first time that builder confidence has improved for three consecutive months since mid-2009, which signifies a legitimate though slowly emerging upward trend,” said NAHB Chief Economist David Crowe. “While large inventories of foreclosed properties continue to plague the most distressed markets and consumer worries about job security and the challenges of selling an existing home remain significant factors, builders are reporting more inquiries and more interest among potential buyers than they have seen in previous months.”

Existing-home sales might also pick up, because of the fire-sale prices. Foreclosures and short-sales now make up some 30 percent of existing-home sales, according to CNBC’s Diana Olick. But that number might change with the new revisions of existing-home sales since 2007 by NAR. As it is, existing sales jumped 4 percent in November. Total housing inventory at the end of November fell 5.8 percent to 2.58 million existing homes available for sale, which represents a 7.0-month supply at the current sales pace, down from a 7.7-month supply in October.

Graph: Calculated Risk

So who is right, Karl Case or Patrick Newport? Even 600,000 new households is a doubling of last year’s new households. And that is why we are seeing more housing construction. Much of it has to be rentals, but the pressure to build will continue as more of the echo boomers find jobs and leave their parents’ homes.

Harlan Green © 2011