Homeownership Is Rising

The Mortgage Corner

An improving economy, multiple years of strong job growth and the notable increase in home values in most markets fueled a greater share of purchases from Generation X households over the past year, says the National Association of Realtors in a recent survey.

And that is helping to boost the all-important household formation of younger generations, which is what ultimately precipitates home sales, especially among those young adults who are forming families.

This is according to the National Association of Realtors® 2017 Home Buyer and Seller Generational Trends study, which evaluates the generational differences of recent home buyers and sellers. The survey additionally found that a growing number of millennials and younger boomer buyers have children living at home; student debt is common among Gen X and boomer households; more millennials are buying outside the city; and younger generations are more likely to use a real estate agent.

Graph: SF Fed

A notable shift in the relative household growth rates after 2007 reflects declines in “headship” rates, that is, the share of the population identified as heads of households, according to a report by the San Francisco Federal Reserve. It is mostly the result of the Great Recession that decimated the earning power of so many young adults, in particular. This means that for over five decades headship rates in the United States had increased on average before falling off in the wake of the financial crisis after 2007.

The patterns in headship rates over the housing cycle differ considerably across age groups. Specifically, in recent years most of the changes were among young adults. For two groups—ages 18 to 24 and ages 25 to 29—headship rates have declined appreciably in recent years. Headship rates among older age groups have been more stable.

Also apparent in the SF Fed’s chart is that headship rates among young adults rose considerably from the mid-1990s up to the financial crisis. That was the period of the strong housing market, rapidly rising house prices, and booming homeownership rates, including among young adults. Indeed, the movements in shares of young heads of household closely track the rise and decline in homeownership ratios.

"Gen X sellers' median tenure in their previous home was 10 years, which puts many of them selling a property they bought right around the time home values were on the precipice of declining," said NAR chief economist Lawrence Yun. "Fortunately, the much stronger job market and 41 percent cumulative rise in home prices since 2011 have helped a growing number build enough equity to finally sell and trade up to a larger home. More Gen X sellers are expected this year and are definitely needed to ease the inventory shortages in much of the country."

The uptick in purchases from Gen X buyers this year (28 percent) was the highest since 2014 and up from 26 percent in 2016. Millennials were the largest group of recent buyers for the fourth consecutive year (34 percent), but their overall share was down slightly from a year ago (35 percent). Baby boomers were 30 percent of buyers, and the Silent Generation made up 8 percent.

This year's survey also brought to light how the soaring cost of rent in many areas is likely influencing the decision of middle-aged parents to buy a home with their young adult children in mind. Younger boomers were the most likely to purchase a multi-generational home (20 percent; 16 percent in 2016), and the top reason for doing so was that children over 18 years old either moved back home or never left (30 percent; 27 percent in 2016).

"The job market is very healthy for young adults with a college education, but repaying student debt and dealing with ever-increasing rents on an entry-level salary are forcing many to either shack-up with several roommates or move back home," said Yun. "This growing trend of delayed household formation is one of the main contributors to the nation's low homeownership rate."

Similar to previous years, roughly two-thirds of millennial buyers are married. One aspect of their household that has changed is the number of children in them. In this year's survey, 49 percent of millennial buyers had at least one child, which is up from 45 percent last year and 43 percent two years ago.

With more kids in tow, the need for more space at an affordable price is increasingly pushing millennial buyers outside the city. Only 15 percent of millennial buyers bought in an urban area, which is down from 17 percent last year and 21 percent two years ago.

"Millennial buyers, at 85 percent, were the most likely generation to view their home purchase as a good financial investment," added Yun. "These strong feelings bode well for even greater demand in the future as more millennials settle down and begin raising families. A significant boost in new and existing inventory will go a long way to ensuring the opportunity is there for more of them to reach the market."

But that isn’t yet the case. Inventories are still in the 5-month range with current sales rates. So something must happen to increase housing inventories of existing homes, such as the sale of tens of thousands of foreclosed homes hedge funds purchased at fire sale prices when the housing bubble burst that are rental units.

The Blackstone’s Invitation Homes subsidiary, under the auspices of Blackstone's real estate leadership, began purchasing homes in 2012 and eventually amassed more than 60,000 homes, investing $1.2 billion in renovations. At one point it was reportedly spending $150 million per week on homes.

And now the Dallas-based single-family rental real estate investment trust, one of the largest in its class, raised $1.54 billion in an initial public offering this January. It priced 77 million shares at $20 each, well within its previously stated range of $18 and $21, said the press release.

So until hedge funds decide it’s no longer lucrative to hold rental properties, we may continue to experience a housing shortage, which means prices will continue to rise above the inflation rate for the foreseeable future.

Harlan Green © 2017

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Don’t Forget the Millennials!

Popular Economics Weekly

In Janet Yellen’s current congressional testimony, the Fed Chair is saying the Fed could keep rates low for a long time to come. Why? Because unemployment is still too high, and economic growth too slow at present.

That’s because the CBO says thanks to the lingering effects of the recession, the aging of the country, the shrinking of the labor force, and various tax and spending policies, the nation now only has the potential to grow about 2.1 percent per year over the next decade, on average.

We believe that is far too pessimistic an outcome. For starters, GDP growth has averaged more than 3 percent over the long term, including the Great Depression. And no one is taking into account the next generation, the Gen Y’ers or Millennials, entering the workforce, which because of their size should kick start growth around 2020, and obviate the worries about soaring budget deficits as the baby boomers retire.

Graph: Trading Economics

In the last two decades our growth rate has been steadily decreasing. The 50’s and 60’s average growth rate was above 4 percent, It dropped to around 3 percent in the 70’s and 80’s. In the last ten years, the average rate has been below 2 percent and since the second quarter of 2000 has never reached the 5 percent level.

Yet if government was ever allowed to create jobs again, we could have above average job creation, and so higher GDP growth for decades to come. The New Deal proved that. When New Deal spending kicked in, it boosted growth by literally creating millions of WPA, CCC jobs that resulted in new highways, bridges, dams, and the care of natural resources. Conversely, when government spending was cut back prematurely in 1937 in an attempt to balance the budget, the Great Depression resumed.

Graph: Seeking Alpha

Especially spending on public infrastructure stimulates the U.S. economy in the short-run, given that there is some $2.2 trillion in deferred infrastructure maintenance, according to the US Society of Civil Engineers. Investing in infrastructure goes beyond mere improvements to the quality of roads, highways, sewers, and power plants. These investments also generate “significant economic returns for other portions of the U.S. economy and substantially increase ultimate tax revenue for the government,” according to a 2012 College of William & Mary academic study.

And what about demographics, the assertion that since baby boomers are retiring, the work force will shrink rather than grow, further cutting GDP growth? Ah, but we are speaking of the so-called Millennium generation born between 1981 to 1998, which numbers more than 70 million in the US alone. In fact, one commentator maintains, starting around 2020 (or a few years after 2020), the U.S. should see another robust growth period similar to the period enjoyed by the baby boomer generation.  This is because there will be just as many new workers in the work force from the Gen Y or Millennial generation as there were in the baby boomer generation. 

Barron’s Magazine has been looking at the Millennials’ potential. FOR ONE THING, THE MILLENNIALS -- sometimes called Generation Y, and defined by many demographers as ranging from ages 18 to 37 -- make up the largest population cohort the U.S. has ever seen. Eighty-six million strong, it is 7 percent larger than the baby-boom generation, which came of age in the 1970s and '80s. And the Millennial population could keep growing to 88.5 million people by 2020, owing to immigration, says demographer Peter Francese, an analyst at the MetLife Mature Market Institute.

This echo-boom generation totals 27 percent of the U.S. population, less than the 35 percent the boomers represented at their peak in 1980. When the baby-boom generation drove the economy in the 1990s, growth in gross domestic product averaged 3.4 percent a year. As the Millennials hit their stride, they could help lift GDP growth to 3 percent or more, at least a percentage point higher than current levels.

So there’s no real reason to be so pessimistic about economic growth and a soaring federal deficit for decades to come. If GDP growth is dependent on workforce growth, and 1990’s growth repeats itself—which was the longest uninterrupted economic expansion in our history that also gave us 4 years of budget surpluses—then we may see the next generation already taking charge. And they could turn out to be much more industrious than we know!

Harlan Green © 2014

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