Unwrench the housing cycle
A recent story I just read has me looking at my 10- and 8-year-old boys in a whole new light. It turns out that the number of people still living with their parents between the ages of 18 to 34 rose to its highest level in recorded history last month. The story didn’t say how many of those adult children were paying rent.
The story, published last week in the Wall Street Journal, based its numbers on census data analyzed by Trulia and said that almost 40 percent of all people between the ages of 18-34 still live with their parents. As a mortgage banker, that means there are a whole lot of potential customers that need to buy houses. As a father, that means I need as many of those customers as I can get or else I’m never going to be able to downsize out of my house and retire.
The housing industry is an incredibly reactive industry. The amount of activity in the different market segments depends on a number of cyclical factors all playing off one another. One of the biggest factors is the cyclical movement of buyers moving up the financial ladder.
As we all improve our financial lives by getting promoted at work, increasing our sales numbers or growing our small businesses, we tend to buy more expensive houses. We “move-up.” But for us to move-up, we need buyers who are also moving up from their situations into ours. So, you might have a first-time homebuyer purchasing his starter home. That enables the couple living in that starter home to move up to their new home. This enables the family in that home to move up into its new home, which enables the empty nesters to move back down to a smaller, lower maintenance home. If one of those groups decides not to move up or down, you could see how it could clog the pipeline.
My friend Steve Beecham broke for me recently. He had a much more complex science of all of this and used this cycle to explain why housing inventory is so low in Atlanta right now. He’s a long-time mortgage banker and well-known as a motivational speaker. I don’t remember all of the particulars of his science, but he clearly put a lot of deep thought into it, and after reading the Journal report a couple months later, he was clearly onto something. If these millennials are staying in their parents’ basements, then they are not relieving the couples wanting to move up out of their starter homes. But it’s not just that these millennials are staying at home, when they do move out, they are more comfortable than previous generations in renting. So clearly, they are one wrench in the gears of Mr. Beecham’s described cycle.
But let’s not blame those poor millennials for everything. The financial collapse of 2008 also had a huge impact on this cycle. In one way, it kind of reversed it for many people who lost their jobs, or saw salary reductions at their current jobs and were forced backward – to move down into less expensive homes. Many of them are just getting back to where they were before the collapse but are still gun-shy about taking on a larger mortgage payment.
These theories all help to explain why home inventories are so low. But they also show how quickly the engine of activity could switch into high-gear. Consumer confidence has jumped up and down for the last eight years. If consumers finally start to feel consistently confident in our economy, you could see millennials jump into homeownership at the same time existing homeowners are confident enough to want to move up. So far, the new administration seems to have that confidence up. It if continues, we could see a 2017 pumping heavy on all cylinders.
Of course, then we’ll have to figure out where all the new houses are going to come from. But that’s another story.