Realistic Real Estate


Oil prices have plummeted, the job market has rallied, and consumer spending remains strong. With much-improved balance sheets for many Americans since the market collapse in 2008, economists are awaiting an uptick in home buying.

But after a rebound from the depths of the recession, home price growth slowed in 2014, according to the Standard & Poor’s/Case-Shiller Index. Meanwhile, factors that have often led to growth in housing—particularly job gains, available lending, and low interest rates—have not seemed to fully incentivize new buyers.

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The Rebound Effect
As new home construction plummeted and buyers worked their way through the glut of home supply that resulted from the mid-2000s boom, prices made a fairly sharp recovery after the recession. However, the recent slowdown in price growth suggests that the post-2008 rebound effect has lost its muscle. Meanwhile, new construction remains historically low as builders await a clear picture of demand, which could repress prices or impede the full potential of our economic growth. The contribution of residential investment as an input to the economy remains the lowest since World War II, according to the National Association of Home Builders. Increased housing market activity could lead to more jobs and a higher GDP. But as the rebound effect wanes, the outlook for demand becomes less clear.

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Diminished Demand
As the population increases and general sentiment improves, it would seem demand for housing would rise in tandem. The Consumer Confidence Index improved to 92.6 in December, according to the Conference Board, based on more positive opinions of economic data, particularly regarding jobs. Indeed, the economy added 252,000 in December as the unemployment rate dropped to 5.6%, according to the Bureau of Labor Statistics. Meanwhile, Americans have growth. The contribution of residential investment as an input to the economy remains the lowest since World War II, according to the National Association of Home Builders. Increased housing market activity could lead to more jobs and a higher GDP. But as the rebound effect wanes, the outlook for demand becomes less clear. watched the price of oil plummet, leading to better consumer spending and holiday retail sales compared with last year.

So if consumers are confident enough to spend on goods and services, why not homes? Despite these positive signs in the market, consumer sentiment for home buying reflects some of the more systemic problems facing the economy. In particular, job wages grew just 1.7% in 2014 and actually dropped by 0.2% in December. While overall sentiment has improved, confidence regarding home buying remains stagnant. Only about 25% of consumers believe their income is significantly higher than it was 12 months ago, according to Fannie Mae’s December 2014 National Housing Survey. Until wage growth improves, buyers could wait on the sidelines.


Millennial Mistrust
Modern young adults, known as “millennials,” witnessed one of the greatest financial collapses in our history, just as they tried to enter the workforce. They watched parents lose their own homes and struggle to find employment as retirement funds vanished. And they constitute one of the most important components of housing market demand. There’s a general distrust in the concept of financial wellbeing among millennials. They seem to have learned to not hold any confidence in home value as a “nest egg” or even a fortuitous long-term investment, because as in 2008, prices could plunge.

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Beyond the uncertainty, millennials simply aren’t financially secure enough to commit to such a purchase. They continue to toil to find employment and pay off education debts. Student debt in the nation has topped $1 trillion, and unemployment and underemployment remains an impasse 2 Realistic Real Estate / CONWAY WEALTH GROUP February 5, 2015 for the age group. Even the employed feel they need to pay down debt before they can save enough for a down payment.

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Despite favorable interest rates, the days of minuscule down payments are gone (for now). As a result, young Americans are choosing to rent or stay at home with parents—even if they’re employed—rather than commit to a home purchase. Parents are even waiting to move out or downsize because children are spending more time at home.

If they’re not at home, young professionals are renting apartments in high-density metropolitan areas. The downturn helped bolster this trend, and it remains to be seen what will break it. After 2008, millennials understand the need for financial stability, rather than the reliance of expected home value, when deciding to buy. Until wages improve and debts diminish, demand growth could remain stagnant.


Finding a Balance
Despite the financial unease of younger buyers, newer trends in housing could offer some benefits to the market in 2015. Millennials continue to prefer apartment living, leading to an increase in new apartment construction in the past few years. In 2011, apartment construction contributed more than $42.5 billion dollars and more than 300,000 jobs to the economy, according to a report, “The Trillion Dollar Apartment Industry,” by the National Apartment Association and National Multi Housing Council. While apartment construction could offer some market benefit, single family home starts typically drive higher economic activity. For example, a multifamily start creates just 1.8 jobs in the following year, compared with 3.7 for a single family start, according to Moody’s Analytics.

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Hopefully, slower price growth incentivizes buyers to react to better affordability. If wages pick up steam amid the housing price slowdown, demand could begin to recover. Meanwhile, both buyers and sellers can benefit from extremely low rates. In general, low rates and marginally higher prices offer the most level playing field for both sides of a transaction. In addition, leniency in lending could increase as defaults decline and regulations loosen. As a result, millennials might lessen their hesitancy in making down payments, especially as they continue to play catch up and improve their financial standing amid economic recovery. For now, let’s hope for an uptick in wage growth to jumpstart this process.


Sources

  • Brown, Jeff. How It Can Be a Buyer’s, Seller’s Housing Market at the Same Time. MainStreet, Jan. 8, 2015. Web. Jan. 14, 2015.
  • Cole, Marine. Why a Booming Job Market Hasn’t Led to a Booming Housing Market. The Fiscal Times. N.p., Jan. 9, 2015. Web. Jan. 14, 2015.
  • Case-Shiller Index for October Shows Home Prices Slowing Further. Associated Press. Dec. 30, 2014.
  • Fuller, Stephen S., Ph.D. The Trillion Dollar Apartment Industry. National Multi Housing Council & National Apartment Association, February 2013. Print.
  • Housing’s Contribution to Gross Domestic Product (GDP). NAHB, Web. January 2015.
  • Irwin, Neil. Why the Housing Market Is Still Stalling the Economy. The New York Times, Apr. 26, 2014. Web. Jan. 16, 2015.
  • Kolko, Jed. What to Expect From the Housing Market in 2015. Time. Trulia, Dec. 29, 2014. Web. Jan. 14, 2015.
  • National Housing Survey Monthly Indicators. Fannie Mae, Dec. 2014. Web. Jan. 14, 2015.

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