Via Dr. Housing Bubble blog [8],
The Federal Reserve conducted a study on Millennials and tried to ascertain why so many of them are living at home. Is it too much student debt? Lower incomes? Or is it that home prices are simply unaffordable [9]? The study finds that all of these factors have a big impact on why many Millennials are living at home and why the first time home buyer market is performing so badly. It also gives us insight into the shifting building demand of new construction. Many builders are focusing their energies on multi-unit structures to cater to an audience that will look for rentals or lower priced condos. There is a heavy renting trend [9] undertaking this country. We are seeing a record numbers of young people living at home with mom and dad heading directly back into their childhood rooms to rock out the NES and attempting to pass Super Mario Brothers once again. There are major implications for housing because of this new structural change. First time home buying is down dramatically. Construction is catering to a lower income cohort. Let us look at what the Fed found in their report.
The massive number of young adults living at home
One of the interesting findings [10] is that the trend of young adults living at home has continued on an upward slope going all the way back to 1999. Even the toxic mortgage days of Housing Bubble 1.0 didn’t really shift this figure by much. But the homeownership rate increased which means that the push came from older cohorts or young buyers that had the misfortune of buying near the top (and of course many were burned in epic fashion [11]).
So let us look at the findings:
[12]
Nearly half of those 25 years of age are living at home with parents. The rate is up to 30 percent for those 30 years of age. These are dramatic increases from 1999. There has been paltry data on the makeup of housing composition because some were saying that many were shacking up with roommates. That does not appear to be the case:
[13]
If you were placing a bet, you would be in a good position putting your money on those 25 years of age living at home with parents. The first time home buyer market continues to perform pathetically. Of course, with investors pulling back we now have the FHFA trying to push for 3 percent down payment [14] loans to get the juices flowing again. We are already at 5 percent down payments so this move to 3 percent will likely offer minimal help for younger Americans.
One of the better graphs from the Fed report is the combination of all these factors into one spot:
[15]
The homeownership rate of the 30 year old cohort has tanked starting in 2007 with the market implosion. That is very clearly illustrated by the green line above. Why? These were the folks buying with toxic mortgages and timed the market very poorly (or simply had bad luck). The rate of those young adults living at home has gone up unabated since 1999. Of course the increase in home prices has been driven by investors [16] and this will simply make it harder on a cohort with lower incomes and much higher levels of student debt.
It is safe to say that many more young Americans will be renting deep into their adulthood [11]. It is also safe to say given the current cost of college that many more young Americans will be coming back home to live with mom and dad. The Fed’s findings are simply reinforcing this trend.
Given the boom and bust nature of housing, we already see that the rate of price increases is slowing down very quickly:
[17]
The pattern seems to be clear. Prices ramp up. The economy hits a hiccup. And prices come trending lower. This even happened in the 2010 to 2012 period. Look at where we are at right now. And the recent run up in 2013 was largely driven by a fickle group in investors.
Millennials are living at home for the following reasons:
-Heavy levels of student debt
-Lower wages
-Inability to afford current home prices and in many markets, current rents
So how this sets up for a pent up demand for expensive homes or nicely painted crap shacks [18] is really beyond the data.
The demand will be from older Friskie eating households, investors, and foreign buyers.
* * *
It was interesting to see the number of EB-5 visas being pumped out largely to those from China:
“(WSJ [19]) To finance the concrete-steel platform, Related tapped a little-known and at times controversial federal visa program known as EB-5, which offers green cards to foreign families who invest at least $500,000 in U.S. projects that create at least 10 jobs per investor.”
It doesn’t even have to be 10 jobs necessarily but the hours have to work-out to the equivalent of 10 jobs. I’ve heard of people buying places like yogurt stores or fast food chains. Not exactly 10 great paying jobs but enough to keep young adults living at home with mom and dad. Since real estate volume is low margin in some markets, even having a few hundred buyers in one area can shift prices dramatically:
[20]
[21]
“(WSJ [22]) These investors aren’t coming for the investment,” said Yi Song, a New York lawyer who works with Chinese clients. “They are coming here for their children to obtain a better education and to get residence as an insurance policy.”
The EB-5 program was virtually non-existent in terms of volume even just a few years ago. That is no longer the case.
But again, the demand isn’t coming from younger Americans that are suddenly making so much money that they are buying real estate. Short of better paying jobs, the first time buyer market is going to have a tough time.
