While fear surrounding the coronavirus has impacted markets, Ralph McLaughlin doesn’t see it spreading into the U.S. housing market. Chief Economist and Senior Vice President of Analytics at Haus, McLaughlin explained to Financial Sense Newshour listeners the housing market's strength and where he sees it heading in the near and long term.
Housing Looking Healthy
In the past year, McLaughlin said housing sentiment has taken a 180 degree turn: From existing and new home sales to construction permits, most housing markets in the U.S. appear to be in great shape. At this point last year, housing was halfway through its 18-month cooling period, he added, with some concerned that housing would continue to cool to a point where prices remained flat on a year-over-year basis.
Other indicators were also starting to fall at that point last year, such as new home sales and new starts. Those have also turned around, with four straight months of increasing home prices. New home sales are also up, existing home sales are up year-to-date and home builder confidence is near a 20-year high. So, what’s causing this new strength?
“We really think the turn-around in the housing market is combination of cyclical forces, which include (historically low) mortgage rates but also some structural changes in the housing market,” McLaughlin said. “Cyclically speaking, mortgage rates are around a seven or eight year low. That certainly is helping draw people in.”
The Millennial Tsunami of Home Buyers
While low mortgage rates certainly help, they typically aren’t what induce home buyers. Life circumstances are much more important when it comes to deciding to become a homeowner, McLaughlin stated. This leads us to the structural element at play in the U.S. housing market that is likely to be the driving force for the foreseeable future, he said. This persistent tailwind for the housing market comes from demographic inertia.
A large portion of the U.S. population is under 40, and many of these people do not own homes, at least yet. However, millennials do appear to have the same appetite for home ownership as their parents do, and are increasingly turning to purchasing homes. This will lead to a demographic shift, as younger first-time buyers enter the market.
“A lot of young people are really starting to buy homes,” McLaughlin said. “That trend may be with us for at least the next five years, almost irrespective of what happens with the U.S. and world economy.”
What Could Derail Housing Markets?
Unless a major black swan event occurs, on the scale of societal collapse, McLaughlin doesn’t see much that can stop this tsunami of demand coming from millennials. Homeownership rates among millennials is still historically low compared to other generations, but almost all of the increase in homeownership rates over the last couple of years is thanks to those under 35 buying homes.
Ten years ago, everyone thought millennials were fundamentally different from other generations, and that they were no longer interested in owning homes. When in reality, the generation was delayed in exercising their preferences due to a variety of societal and economic pressures like crushing student loans.
McLaughlin doesn’t see the coronavirus as anything to worry about in terms of the U.S. housing market and he thinks it’s unlikely to change this demographic pressure. The epidemic may cause a serious slowdown in China and it certainly has the capacity to cause a recession in the U.S., but McLaughlin believes the millennial tsunami of housing demand will overcome these headwinds.
“I don't see anything causing the housing market to slow down,” he said. “Millennials are starting to buy homes. They're starting to have children. Maybe they’re doing it later in life, maybe they’re not having as many children, and maybe they’re not getting married at the same rates of other generations, but it's starting to happen. Things are very solid and I can't think of anything that will get in the way of this demographic inertia over the next five to 10 years.”
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