THE AMERICAN DREAM IS STILL ALIVE – JUST NOT QUITE AS EASILY ATTAINABLE

I don’t think it’s about simply owning a house.  It’s about an entire package.

We Americans, traditionally, want a stable home life, one that we create for ourselves through hard work.  That includes a loving family and a place that we think of as home.  Having ownership means that we’ve established ourselves.

Millennials, generally speaking, haven’t achieved this dream yet, for a few reasons.  But they still want it.

Research from Gallup reports that 86% of Americans ages 18 to 34, basically the Millennials, want to get married someday.  Unfortunately, in 2014, only 27% of them were married.  According to the Census Bureau, 36% of Gen-Xers and 48% of Baby Boomers were married at that age.

And Millennials—despite the stereotypes that exist of them to the contrary (like living only to post pictures of themselves on Instagram)—want kids.  In 2013, 87% of those 18 to 40 without children said they wanted to have kids someday.

This leaves us with one piece of the American Dream puzzle to discuss: a home.

We know people would rather own than rent.  The Urban Institute noted that 81% of renters would rather purchase a home but don’t think they have the means.  The biggest reasons cited for not buying were affordability and qualifying for a loan.

Money plays a part in each of these big life decisions: when to marry, when to have kids, and when to buy a home.

It’s easy to say that few people have enough money when they’re young to feel comfortable getting married or having kids but that they should do it anyway.  But, when buying a home, the situation is a bit more tangible.  You must have the money or you simply don’t get a house.

It’s Hard for the First-Time Buyer

Today, the typical first-time homebuyer is 31 years old.  Rising numbers of this group will reach age 31 through 2026.  We’re halfway through what should be a booming new-home market, and yet sales remain stuck near recession levels.

New single-family home sales touched almost 1.4 million units per year in the housing boom.  Clearly that was a bubble.  After it burst, sales dropped to less than 300,000 per year, the lowest level of new home sales on record.

We’re recovered to just over 600,000 per year, but that’s less than the average number of units sold during the 1980s and 1990s.  The National Association of Home Builders (NAHB) estimates we need about one million new homes a year to meet demand.

In this context—young people want to buy homes, and there are more people of the age to buy new homes than at any time since the Boomers came of age in the 1980s and 1990s—builders should be falling all over themselves to build homes that cost around $200,000.

A family earning $65,000 to $70,000 per year—the median income of a household aged 31 to 34 was $65,768 last year—could afford units near that price.  And yet that scenario isn’t playing out.

Instead, builders focus on homes between $300,000 to $400,000.  The median home price in the U.S.is $306,000.  Since 2011, the number of affordable units priced under $200,000 continued to fall.  And, in 2014, builders started constructing more expensive homes than affordable units.

It looks like builders are ignoring their biggest opportunity: selling first homes to the growing market of Millennials as they reach the prime, first-time homebuyer age of 31.

It doesn’t make sense.  No retailer would willingly ignore a growing potential customer base, resigning his or herself to selling 60% of what the market would bear.  There has to be a reason.

The Costs of Building Homes

It turns out that builders have the same problem as their young clients: money.  They simply can’t afford to price a home so low.  Builders are bumping up against the reality of higher costs for regulation, land, and construction.

Not to be left out, builders are charging a bit more, meaning they’re earning higher profits.  In 2011, clearly a difficult time for the industry, the average profit was 6.8%.  In 2016 the percentage rose to 9%.

With fewer than 100,000 new homes priced at or below $200,000 built in 2016, it’s obvious that many would-be-first-time-homebuyers are out of luck.

The New Buyer Profile

Last year, 17% of first-time homebuyers—of both existing and new homes—financed 100% of the purchase price.  That’s almost one in five borrowers who have no skin in the game; no equity built up.

An additional 29% of the first-time buyers put down less than 5% of the purchase price, and another 15% put down less than 10%.

All told, 61% of first-time buyers put down less than 10% on their homes.

That’s a shockingly large number of homeowners with very little equity.  But the dollars aren’t so small.  At today’s median price, a new-home buyer would need more than $60,000 to put down 20%.  That’s a big chunk of cash, especially for a young couple buying their first home.  Even at 10% they’d need over $30,000.

With prices so high, it’s easy to see why they choose alternative financing methods—just like I did way back with the FHA—to get their feet in the door.  The difference is that my downside was miniscule.  Still, you do what you have to do.

And we want Millennials to buy homes, because it works out better for the broader economy.

A Supercharge Waiting to Happen

Homeowners who buy a newly constructed home typically spend $4,500 more in their first two years in the new house than their non-moving homeowner counterparts do in the same period.  For those that buy an existing home instead of a newly built unit, the difference is $4,000.

Those buying new homes spend the money on appliances and furniture, whereas those buying existing homes spend less on those items but more on repairs and renovations.  All these purchases spur economic activity, which boosts GDP.

And, to become homeowners in the first place, these young buyers borrow a lot of money.

To fund operations, those lenders issue bonds, which end up in the portfolios of pension funds, insurance companies, and mutual funds.  The home-buying process, particularly for young first-timers, supercharges the economy through credit creation, giving the buyers the capital needed for the transaction and providing investors with the long-term debt needed to meet their financial goals.

It’s a win-win.  That’s just on the buying half of the equation.  Moving to the selling side, home building boosts GDP and employment.

Residential homebuilding as a share of GDP usually fluctuates between 4% and 5%.  During the housing boom of the mid-2000s, it jumped to almost 7% of GDP, but then it fell to an all-time low of 2.4% in 2012.

The problem is that homebuilding’s share of the economy hasn’t rebounded very much, sitting now at 3.8% of the GDP.  That’s the same level reached during the recessions of the early 1980s and early 1990s.  And this comes after five years of rising home prices and nine years of economic expansion!

The same trend is playing out in employment.  Building a home takes a lot of labor, including carpenters, electricians, plumbers, roofers and other workers.

Residential home building employment has only recently climbed back to the lowest level of the recession of the early 1990s.

Homebuilders claim they need more workers, a situation exacerbated by the hurricanes we saw in Texas and Florida in late August and early September.  Before Hurricane Harvey, the U.S. had an estimated shortfall of 228,000 construction workers.  But numbers like that always strike me as a bit disingenuous.

Can it be true that contractors are willing to hire an additional quarter million people but no one wants those jobs?  I think the reality is a bit different.  It’s not that people aren’t available.  It’s that we have a skills gap that no one is willing to pay to close.

Contractors lament a lack of workers with specific skills, but where are the training programs for those skills?  When housing fell off a cliff in the late 2000s, not only did skilled workers leave the field, but new workers stayed away.

To rebuild the labor force, someone has to train the new hires.  If builders have such a shortage, they can use some of their increased profits to train the next generation of workers.  So far they seem unwilling.

The situation boils down to cost.  With rising land, labor, construction material, and regulatory costs, builders can’t construct homes that most young, first-time homebuyers can afford, which means slower family formation among the Millennials compared to previous generations.

When this integral piece of our economic pie doesn’t grow, it drags on the entire economy.

With fewer new homes on the market at affordable price points for young, first-time homebuyers, more of them will most likely turn to existing homes.

With a limited supply of homes within a manageable commuter distance of major urban areas, this market won’t give the economy the same economic boost as new homes.  But it does give Millennials a way to make progress toward the American Dream.  And it also increases spending on renovation and repairs.  This market has become a staple of everyday life, with real estate-flipping shows clogging the airways, outlining how do-it-yourself homeowners can dramatically improve their property on modest budgets.

1 Comment

Filed under Blog

One response to “THE AMERICAN DREAM IS STILL ALIVE – JUST NOT QUITE AS EASILY ATTAINABLE

  1. Gary W.

    Hi Art, Very interesting topic with lots of detail that supports my opinion about this situation. Also, most Millennials have college debt, usually in the tens of thousands of dollars which work against their ability to qualify for a mortgage. This is just one more hurdle in their quest for home ownership and family formation.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s