Echo Boomers Will Fire Up Housing Market

Housing-related stocks are seeing an earlier than called for a push to a higher high. But if lumber prices are right, there are lots more gains to come.

By that, I am referring to the way that lumber prices tend to give a 1-year leading indication for the share prices of housing-related stocks, like those which make up the HGX Index. In the chart above, the plot of lumber prices is shifted forward by 1 year to reveal how the up and down movements seen in lumber futures prices tend to get echoed a year later in the housing sector stocks. It is not a perfect relationship; it is merely very good.

Read US Housing Recovery Continues, Though Headwinds Remain

One reason for this relationship is that lumber prices also give a leading indication for new home sales. There is a decent amount of lumber involved with the construction of a new home, so it makes sense that there should be a correlation. But why it works out to be exactly a year is a bit of a mystery. Chalk it up to the market being smarter than the economists.

The latest data on new home sales for July 2016 showed the highest rate since 2007. It is still a long way from the peak years of the early 2000s when all of the Baby Boomer generation were buying McMansions, but a new multiyear high is still a good thing.

And this new multiyear high is coming earlier than lumber said it should. Perhaps all of that pent up demand during the early 2010s is finally getting to work on the housing data. Lumber’s message is that we should really see a big rise in the new home sales data, and in the housing sector stock prices, after the echo of the September 2015 bottom in lumber prices. How much of that big upcoming rally is getting taken up by this earlier than expect surge is hard to say.

What I can say is that there is a good reason why new home purchases have been lagging in the past 8 years, and it is not all about the financial crisis and the central banks’ response.

According to Zillow, the average age of a first-time home buyer is 33 years old. That number has been creeping higher from a low of 29 in the late 1970s, but it is an important concept. When there is a dip in an age cohort, there are fewer people at the right age to be buying their first home.

Here are data from the 2010 census, showing the numbers of each age cohort as of April 1, 2010. If you think back to how old you were on that day, you can find the bar for your own age cohort.

After the introduction of oral contraceptives in 1962, births still stayed high for a couple of years as women were slow to adopt that new medical technology. But beginning in 1965, births dropped off sharply, and stayed lower than trend until recovering in 1980. So all of those babies who were not born in the late 1960s and all during the 1970s did not grow up to become people who could buy their first home in their early 30s.

In 2009, at the bottom of the financial crisis when new home sales were also bottoming, the 33-year-olds were people who were born in 1976. That was a big low in the age demographic curve. Now we are seeing the babies born in the more hopeful 1980s hitting their stride and starting to buy homes. But the crest of this wave is still coming.

The peak birth years for the “Echo Boom” generation (kids of Baby Boomers) were 1990-91. So the babies born in those years are now just 25-26 years old, and still a few years away from hitting that 33-year-old sweet spot for buying their first homes. In other words, the wave is coming, and it should be bullish for real estate prices.

The question now is how fast are the Baby Boomers going to start trying to move out of their McMansions (and trying to unload their Fed-inflated bond portfolios), and how quickly will the Echo Boom generation pick up that slack. Lumber’s message says that after September 2016, we should at least see a 1-year up move for new home sales and for housing sector stocks.