Real R OI
MY TAKE: The Risk of Too Few Homes
The boost in demand coming from the aging of Millennials and extended lifespan of Seniors is putting pressure on a housing market that is unable to build enough homes. The result is continued pressure on house prices. Despite the recent moderation in house price growth, house prices are still outpacing incomes.
investment subtracted from growth. Fading housing market activity is a typical precursor to U.S. recessions, so many bearish analysts pointed to 2018 housing market indicators. The decline in housing market activity wasn’t too surprising when you consider what happened with mortgage interest rates in 2018. At Freddie Mac, we track mortgage mar- ket trends very closely. My team helps run the weekly Primary Mortgage Market Survey, which tracks the aver- age rate on several popular mortgage products going back to 1971. By far, the most popular product is the 30- year, fixed-rate mortgage. After near- ly hitting a 5 percentage point average rate last fall, rates have fallen to 4.12 percent in our survey for the week of April 11, 2019. The run up in rates last year was a significant factor driving the housing market slowdown in 2018, and this was not unprecedented. My colleagues at Freddie Mac have studied periods of interest rate increases and found that, following a period of sustained mortgage rate increases, home sales fell about 5 percent and housing starts fell about 10 percent. That isn’t too far from what we experienced with exist- ing home sales in the fourth quarter of 2018, which were down 8 percent from the fourth quarter of 2017 and housing starts were down about 6 percent over the same period. Mortgage rates declining in the early months of 2019 is a reason for optimism about housing market activity, but there is more reason for optimism than just the short-term boost from lower rates. When we look at housing market activity, it helps to think beyond the business cycle. Statistical decomposition of housing market indicators reveals medium-term (8-32 years) and THINKING BEYOND THE BUSINESS CYCLE
of Seniors. They found that Seniors born after 1931 are staying in their homes longer, and aging in place, resulting in higher homeownership rates for this group relative to pre- vious cohorts. In total, Seniors are holding 1.6 million housing units off the market by aging in place. The boost in demand coming from the aging of Millennials and extended lifespan of Seniors is putting pressure on a housing mar- ket that is unable to build enough homes. The result is continued pressure on house prices. Despite the recent moderation in house price growth, house prices are still outpacing incomes. Over the next few years, hous- ing demand will provide a boost to housing market activity. However, a significant longer-term risk is that the imbalance between supply and demand will trigger another house price bubble. The experience of the last decade shows that the inevita- ble collapse of a house price bubble is far more painful than the ebb and flow of the typical business cycle.
long-term (>32 years) trends are important drivers of housing market activity. These trends reflect demo- graphics that, over the long run, will dominate housing market activity. To think about this, we need to con- sider the housing market life cycles of both the young and the old. The Millennial generation will drive housing market activity for years to come. They have been slow to start their housing life cycle com- pared to earlier generations, partly because of sociological changes and partly because of economic factors. In a pair of studies (here and here), my colleagues and I examined the factors driving household forma- tion and homeownership for young adults of the Millennial generation as compared to Gen Xers at the same age. We found that sociolog- ical factors, like delayed marriage and lower fertility rates, were signif- icant drivers of delayed household formation and homeownership among Millennials. However, these factors were dwarfed by economic factors such as declining labor force participation and higher housing costs. Our research showed that higher real housing costs explains almost half of the 8 percentage point decline in young adult home- ownership rates for Millennials as compared to Gen Xers. On the other end of the age spec- trum, my colleagues at Freddie Mac looked at the housing choices
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Len Kiefer is the Deputy Chief Economist at Freddie Mac and is responsible for primary and secondary mortgage market
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analysis and research, macroeconomic analysis and forecasting. Kiefer is also involved in the analysis of policy issues affecting the housing industry.
18 think realty housing news report
june 2019 19
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