MARKET WATCH: What’s Happening? The U.S. housing market appears to be strengthening. Prices, sales, and housing starts are on the rise, along with sentiment data showing that consumers and homebuilders are growing more optimistic. Many analysts attribute the recovery to Millennials finally taking the homeownership plunge.
Our Take: But the data don’t bear this out. It’s Boomers, not Millennials, who are forming new households. And homeownership rates have stagnated among all age brackets. Bottom line: If Millennial behavior doesn’t change, the out-year prospects for housing are less favorable than most experts suggest.
Will 2017 turn out to be the year of the Millennial homebuyer?
Forecasters and investors predicting so must have been heartened by the housing market’s strong start to the year. According to the latest quarterly report by the National Association of Realtors (NAR), U.S. median single-family home prices jumped up 7% YOY in Q1 2017, fueled by the strongest quarterly sales growth in a decade.
This is just the latest good news for a sector that appears to be regaining its footing. Single-family home prices rose in 85% of major metros YOY in Q1 2017. The Case-Shiller index of national home prices hit its highest level in March since the downturn. In white-hot markets like Los Angeles, prices are rising so quickly that prospective buyers have to take drastic measures: One couple featured in the Los Angeles Times bid $100,000 over the asking price on their desired home and wrote a “love letter” to the sellers—and still got outbid.
As Hedgeye’s own Josh Steiner and Christian Drake covered at length in their recent Black Book, these rising prices are backed up by equally strong sales data. Single-family housing starts and permits both rose YOY in Q1 2017 (by 6% and 13%, respectively). Both new- and existing-home sales are accelerating as well. The recovery of the single-family market somewhat softens the blow of a lagging multifamily market, once the housing sector’s top growth engine. (We first identified multifamily homes as a high-growth market in “The Housing Market’s Slow Train to Recovery.”)
Likewise, sentiment data are bullish. Fannie Mae’s monthly Home Purchase Sentiment Index rose to 86.7 in April, the second-highest level since the end of the Great Recession. The National Association of Home Builders/Wells Fargo Housing Market Index registered a preliminary reading of 70 in May, up 12 points YOY.
To be sure, some recent bad news is tarnishing this strong performance. Residential construction spending contracted -0.6% in April, its first M/M decline in seven months. Pending home sales also dropped -1.3% in April M/M, while single-family and multifamily housing permits were both down. But much of this can be chalked up to what Steiner and Drake call the “Easter Distortion”: The holiday, which tends to have a deflationary effect on housing, occurred in April this year, dragging down the market and distorting the YOY comps.
These data points notwithstanding, the question remains: What’s fueling the housing market’s recent restart? Strengthening family balance sheets (see: “A Good Year for Middle America”), improving credit scores, still-low interest rates, and soaring rents have all made homeownership ever-more appealing.
Many housing forecasters and homebuilders have spotlighted Millennials in particular as the driving force behind this rebound. Fannie Mae’s Doug Duncan is quoted as saying that, in Q1 2017, “Millennials showed especially strong increases in job confidence and income gains, a necessary precursor for increased housing demand from first-time homebuyers.” Meanwhile, a recent headline in The Wall Street Journal calls starter homes “The Next Hot Housing Market.” Homebuilders are taking the hint: In Q1 2017, 31% of homes built measured 2,250 square feet or less—up from just 24% in Q1 2015.
BEHIND THE NUMBERS
But there’s no cause for celebration yet. A look at the data indicates that Millennials’ participation in the home rebound has been overstated.
Let’s examine the primary drivers of housing demand growth.
Household formation: driven by Boomers, not Millennials. First is the rate of household formation. The more people who form new households via buying or renting (for whatever reason: graduating college, leaving home, or separating from friends or a spouse), the greater the total demand for housing units.
In recent years, the number of U.S. households has gradually risen (up 8% since 2007), but this climb has been driven entirely by a surge in new older households. Census data show that the number of households under age 45 has been virtually stationary since 2009—and remains 3% lower than it was in 2007. A slight demographic bulge in the 30-34 bracket (up 8% since 2007) has been overwhelmed by the demographic Xer bust in the 35-44 bracket (down -7%) and by late bloomers in the under-30 age bracket (down -3%).
Meanwhile, household formation in every age bracket over 55 has soared. Late-wave Boomers have pushed the 55-64 bracket up by 24%; more affluent early-wave Boomers have pushed the 65-74 bracket up by 47%.
It’s not just that Boomers are a large generation. As we’ve mentioned before (see: “Boomers Go Solo”), individualistic Boomers are behaving differently as seniors: They’re still divorcing; they’re still buying vacation homes and timeshares (unlike Millennials, they don’t rent via Airbnb); they’re adamantly refusing to enter institutional care; and they’re often becoming “heads” of the very households in which their adult Xer and Millennial kids are living.
Homeownership rate: stagnant among all age brackets. The other force driving the warming housing market is the new trend away from renting and toward the purchase and ownership of homes. In Q1 2017, the United States added more new-owner households than new-renter households for the first time since 2006. Likewise, according to Fannie Mae, 42% of all homebuyers so far this year have been “first-time buyers” (defined as those who have not owned a home in three years)—up from just 31% in 2011.
But let’s keep this trend in perspective. Over the last year, it has halted the overall decline in the U.S. homeownership rate. But it has not yet raised the rate, either overall or for any age bracket. Census data reveal that 63.5% of householders owned their home in Q1 2017, statistically unchanged from Q1 2016. Ditto for Millennials under age 35: 34.3%, unchanged from a year earlier.
Yes, “first-time buyers” are up. But many of these, according to Fannie Mae’s definition, could be Xers jumping back into the housing market for the first time since the recession.
And yes, new home sizes are getting smaller. But this could be in part a response to the demand from downsizing Boomers, who often gobble up the smaller new homes built for young families. According to Skylar Olsen, senior economist at Zillow, “The size that a Millennial buys and the size that a Boomer buys is not wildly different. Millennials buy a 1,800-square-foot home on average, and a Boomer buys a 1,950-square-foot home. The other generations are away from those.”
WHY AREN’T MILLENNIALS SHOWING UP YET?
So why aren’t Millennials a bigger force behind the housing rebound? Simply put, this generation’s stagnant real wage growth and rising student debt burden has largely kept them out of the market. A 2016 NAR report found that 71% of all non-homeowners say that student debt is delaying them from buying a home. (Of course, it’s Millennials who hold the most student debt.)
According to an Apartment List survey of renters nationwide, more than 40% of Millennials say they’ve saved nothing at all for a down payment. That same survey found that 80% of Millennial renters do eventually want to buy a home or condo. Thus, cost pressures are undoubtedly playing a huge role in preventing Millennials from saving for a home.
Millennials’ close social and familial bonds have also played a huge part in their housing non-participation. Young adults are now more likely to be living in their parents’ home than with a spouse in their own home than any time since the 1880s—that is, since we have data. (See: “Did You Know? Millennials Stay in the Nest.”) Yes, the economic incentive to live with Mom and Dad is significant. But Millennials are unquestionably closer to their parents than previous generations, making it all the more tempting to stick around. Today, living at or near your parents’ home well into your 20s and 30s is almost the norm. For Boomers and Xers, it was a stigma to be avoided.
Unsurprisingly, those Millennials who do buy homes happen to live in affordable locales. Over the first 10 months of 2016, Millennials made up more than half of all homebuyers in Dayton, Ohio, the largest share of any U.S. metro. Rounding out the top three Millennial metros were Harrisburg, Pennsylvania and Grand Rapids, Michigan—similar Rust-Belt cities with low median home prices. That’s a long way from Silicon Valley.
IT’S ALL ABOUT PRICE
Clearly, then, price is key for Millennials. The delicate interplay between rental prices and mortgage prices has the potential to either draw more Millennials into the housing market or lock them out entirely.
Remember: Millennial homeownership has been declining at a time when rents have been rising, which speaks to just how hesitant Millennials have been to take the plunge. From 2010 to 2015, rents rose roughly 20% nationwide. Last year, in fact, mortgages were cheaper than rents in 42 states. The rising relative affordability of ownership should have been enough to make Millennials start buying homes.
But it wasn’t—and that affordability appears to be declining again. Trulia data reveal that median rents nationwide are down 2.9% YOY, which housing economist Felipe Chacón says could mark “the return of a more stable national rental market.” In formerly high-flying rental markets like San Jose, 19.1% of listings have seen rent cuts so far this year. This newfound affordability will disproportionately benefit Millennials, who are more price-sensitive than older buyers. Millennials also have a strong affinity for urban life and are more than happy to let someone else (read: a landlord) shoulder the burden of property liability.
At the same time, as mentioned earlier, homes are getting more expensive. Today, just 33% of all homes on the market are listed at less than $500,000—down from 44% in April 2014. What’s more, inventories are declining fastest for the most affordable homes—which has led to bidding wars and intense competition at the low end of the market. Just as lower rents are a bigger draw to young people, higher mortgages are a bigger obstacle for price-sensitive Millennial consumers.
THE FUTURE OF HOUSING
So where does the housing market go from here? Despite its recent recovery, housing still has plenty of ground to make up: The single-family market, both in terms of starts and actual sales, is still at less than half of its pre-recession peak.
If the market ever plots a full recovery, it won’t be because of today’s older generations. Boomers may be buoying home sales right now with their high rates of household formation, but this trend has a shelf life. As massive Boomer cohorts continue to age out of their working years, their homebuying activity will taper. Xers who are thinner both in number and purchasing power will continue to replace Boomers in pre-retirement age brackets.
Millennials can be counted on to sustain the younger end of the housing market over the next five years or so just by dint of their sheer numbers. The hefty Millennial 1990-91 birth cohorts will begin hitting age 32 (which is the median age of a first-time homebuyer, according to Panel Survey of Income Dynamics data) in 2022. If the young-adult homeownership rate were to rebound strongly just as this demographic wave hits, housing could enjoy a sizable boom.
If, on the other hand, Millennials continue to avoid both household formation and homeownership, the housing outlook will be lackluster. Keep in mind that we’ve already seen a large increase in the size of first-wave Millennial cohorts (now ages 31 to 35) without any demonstrable impact on housing demand. Also keep in mind that the 1990-91 birth-year peak will be brief.
Further into the future? After 2025, most first-time buyers will be late-wave Millennials, on the steep downside of the demographic wave. Around the same time, numerical crest of the Boomers will be downsizing for good, flooding the market with well-used McMansions. By then, the population tailwind will turn into a headwind.
