Popular Economics Weekly
Goldman Sachs economist David Mericle in his research report, “Housing: The Recovery Resumes” says that overall, the message from the broad housing data flow is that the housing market is still at the beginning of a new growth cycle. Real residential investment grew at an 8.8 percent rate in Q2 and is tracking at nearly 15 percent in Q3.
“We continue to see substantial upside for the housing sector in the long run,” said Mericle. “This view is driven by the large gap between the current annual run rate of housing starts, which have averaged about 1 million over the last three months, and our housing analysts' projection of a long-run equilibrium demand for new homes of about 1.5-1.6 million per year, estimated as the sum of trend household formation and demolition of existing homes.”
Trend household formation has been down since 2008. Given the current size of the adult population as well as current headship rates by age or race/ethnicity, the Harvard Joint Center for Housing Studies estimates that demographic trends alone will push household growth in 2015-25 somewhere between 11.6 million and 13.2 million, depending on foreign immigration. This pace of growth is in line with annual averages in the 1980s, 1990s, and 2000s, and should therefore support similar levels of housing construction as in those decades.
Part of the reason for Goldman’s optimism is the millennial generation of echo boomers, children of baby boomers, are beginning to leave home in larger numbers after being held back by the severity of the Great Recession and busted housing bubble. And they are the largest generation born from 1980 to 1996, outnumbering even their baby boomer parents.
More good news is the jobs picture is getting better. Tuesday’s JOLTS report (Job Openings and Labor Turnover Survey) said Jobs Openings rose to 4.8 million in August, up 23 percent year-over-year. The following Calculated Risk graph shows job openings (yellow line), hires (dark blue), Layoff, Discharges and other (red column), and Quits (light blue column) from the JOLTS report.
The number of job openings (yellow) are up 23 percent year-over-year compared to August 2013 and the highest since January 2001. Quits are up 5 percent year-over-year. These are voluntary separations. (see light blue columns at bottom of graph for trend for "quits"), and mean more workers are leaving for better jobs, which means they see better job prospects.
It is a good sign that job openings are over 4 million for the seventh consecutive month - and the highest since January 2001 - and that quits are increasing year-over-year, says Calculated Risk.
So these are good omens for a better housing market. The main problem seems to be supply, and the need for new-home starts that surpass the current 1 million average, thereby boosting new-home sales. But that will depend in large part on those millennials continuing to leave home.
Harlan Green © 2014
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