Millennials Are Not Forming Households Fast Enough To Support the Housing Recovery
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“This is the time of year to write to the Great Pumpkin“- Peanuts character Linus
“You must be crazy. When are you going to stop believing in something that isn’t true?” – Peanuts character Charlie Brown
I read with bemusement every week as pundits and economists stretch the ends of analysis to convince us that the economic and housing recovery is just getting started.
Indeed the most recent Zillow Home Price Expectation Survey of a panel of “experts” predict home value appreciation will exceed 6.5% this year. Eighty-eight percent of the pollyanna panelists polled predict that increases in mortgage rates will present no significant threat to the ongoing housing market recovery.
All is Hunky Dory in real estate land where, from its “recovering” perch, its inhabitants don’t see the 90.5 million people outside the labor force or the 47.5 million people on food stamps.
As I wrote last week, in “The Recovery Has Reversed Course – Welcome to the Revocery” the illusory economic recovery driven by quantitative easing is over.
The recent jobs and retail sales data confirm what Federal Reserve Chairman Ben Bernanke testified to Congress back in June- the economy is weak and if interest rates rise, the economy will tank.
Trulia’s able economist, Harvard educated Jed Kolko has been tracking the real estate recovery in four stages. Click here for an explanation of his methodology. Mr. Kolko’s third stage involves tracking the prices of homes to a “normal” level based on price-to-income ratios, price-to-rent ratios and prices relative to their long-term trend. Mr.Kolko recently concluded that home prices were still 5% shy of normal.
I believe that a price/inventory catch-22 as well as poor wage and job growth and higher interest rates will prevent real estate prices from appreciating much further.
Here Comes Gen Y…., Well Maybe Later
Assuming the third stage of the real estate recovery is passed, the last leg is the anticipation that household formation will increase when, during that glorious moment we will see millennials in their million hordes from California to the Eastern shores emerging from their parents’ basements with full time jobs, reduced student loan debt, sterling credit and an interest in and ability to buy homes.
Mr. Kolko admits that this is not happening yet but believes when it does it will represent large pent up demand for housing.
Millennials may more likely end up in one of American Homes 4 Rent rental homes which were recently 45% vacant than in their own homes or remain in their familial subterranean dwellings for many years. Or perhaps they will end up in any of the tens of thousands of Blackstone, Colony Capital, or Waypoint rental homes.
As we wrote back in April, Gen Y is in bad shape due to poor employment prospects and crushing student loan debt and is no position to provide a strong pipeline of future house sales.
Until we have lower home prices, lower interest rates, lower student debt loads and higher full time employment rates among millennials you can count them out as a factor in the housing recovery.
The waiting begins.
P.S. It’s also quite possible that multi-generational living becomes the new normal. If that happens the cultural urge of millennials to move out from under their parents’ roofs even if it can be afforded, may be significantly diminished. This would sharply reduce any projected household formation growth.