Follow the Trends
During the last 15 years real estate was as a safe, wealth building tool. The so-called real estate boom overcame many economic obstacles to achieve historic growth. It has absorbed a soft landing in the sluggish economy in 1994, an international crisis in 1998, a recession in 2001 and job losses in 2002 and 2003. For the most part home values remained strong. Now that the market is slowing, looking ahead, the question is: will the market be resilient again?
Our company belief is that the real estate market is best analyzed from a local perspective. That is each submarket, town, even street will react differently to market indicators. What is most important to understand is how economic trends are affecting each submarket. Two of the main economic influences that affect housing demand include: 1) Mortgage rates 2) Demographic influences.
Single Digit Mortgage Rates
Mortgage rates have been rising, but the economy is growing and inflation, although a concern, remains in check. According to many market experts, mortgage rates should hover around 7-9 percent (at most). Current mortgage rates are in the 6-6.50 percent range. Keep in mind that from 1979 until 1990 mortgage rates ranged from 10-16%, and never broke the single digit barrier. Despite the recent increases, if rates remain in the single digits, this still provides historically low financing costs for home owners.
Demographic Influences: Baby Boomers, Echo Generation, Retirees & Immigration
Home ownership rates are positively correlated with age. As households grow older, their home ownership rates rise. The long term prospects for real estate values depend, in part, on the underlying demographics of the nation and each sub-market. The greater the number of households the greater the demand for housing will be.
The baby boomer population will continue to age into their peak earning and retirement years throughout the next decade, which will help sustain demand for housing. Baby boomers were the primary force behind the real estate expansion from 1991-2004. Born between 1946-1964, boomers were between 28 and 58 years old from 1992-2004. For the remainder of the decade and into the next, boomers will be between the ages 41 and 68, possessing greater income and wealth potential. In addition, the boomer children (the echo generation) will be entering the housing market.
Generation X (1965 - 1976) is a relatively small population group containing approximately 46 million people. The generation X segment, due to its overall limited size, has not made a significant contribution to the high-growth home buying market. On the other hand, the children of the boomers consist of 76 million people. As the echo segment comes of age, they will significantly bolster first time home buying.
Immigration growth, which surged in the 1980s and 1990s helped to fill the void left by Generation X and continues to play a role in housing demand. Immigration has been a big part of the growing population throughout the country. Approximately 16 million immigrants entered the United States during the past 20 years. Immigrants have accounted for more than 1/3 of household growth since the 1990s. In addition, a large number of immigrants of the 80s-90s have children who will be approaching home buying age in the next ten years. Immigrants are becoming better educated thanks to greater emphasis on home ownership counseling programs and the breaking down of language barriers, which leads to an increase in housing demand.
Finally, the retiree population, combined with the boomer population will merge to create demand for retirement, trade-up and second homes. Advancements in health technology and health care have lengthened the average life span. This has created an increase in demand for retirement homes. It also means the supply of existing homes will remain tighter since a significant percentage of retirees will stay in their existing homes.
What to Watch For
As mentioned earlier, low mortgage rates have been one of the driving forces in the market. Continue to watch these rates. Over the last year rates have risen, as the market has slowed. If rates continue to rise, this will put greater pressure on the market. At the same time, if the economy continues to grow and inflationary pressures are controlled, rates will stabilize or go down and relative house affordability will remain.
Also, keep an eye on housing inventories. It goes without saying that the greater the supply of homes on the market, the more likely there is downward pressure on pricing. What should be appreciated is that homes have many characteristics. The two most important are location and price. If you are looking for a starter home in desirable area, it may not matter that that the supply of homes is at an all time high, if the starter home market is moving at a faster pace. The changing demographics in the area will have a profound affect on housing demand. A push from new, younger buyers may be leading the demand in this particular submarket.
Likewise, if you are looking for a vacation home near the ocean. Again, looking at the supply of homes will be important, but understand what is happening in your price group in the specific submarket or even street. You will not know unless you dig deep into market statistics. The end game is to keep an eye on the economy and the changing demographic trends. At the same time, understand that supply levels for each market and property type will not always be the same. If you follow the trends, you will stay ahead of the market.
Questions or comments about this article? Contact the author - Mathew Roth