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Over the next few years, the United States should see a dramatic increase in the demand for homes. This is not wishful thinking. Underlying demographic trends make it almost inevitable.
It’s easy to be jaded when looking at the real estate market. The epic collapse in prices that began in 2007 left an entire generation permanently scarred. That collapse was preceded by a bubble — fed by a very easy monetary policy, ridiculously lax lending standards and unrealistic expectations — that drove prices to such fundamentally unsustainable levels that some homes purchased at the peak of the madness lost more than 80% of their value.
Many believe that the four most dangerous words in investing are “It’s different this time.” In this instance, though, the naysayers may be proven wrong. Both near- and long-term indicators for the housing market are positive.
U.S. housing starts (the number of homes beginning construction) rose to their highest level since October 2007, according to the Commerce Department. And in a recent survey, U.S home builders reported their highest confidence level since 2005.
These stats are encouraging, but the long-term demographic shift is what’s most promising. The millennial generation, those born after 1986, has a home ownership rate dramatically lower than that of previous generations. Unless you believe these individuals will continue as they are indefinitely — putting off marriage and kids, living with their parents or renting apartments — we should see a substantial shift in their homeownership rates over the next decade.
As reported by Daniel Rohr in Morningstar Magazine, the share of young men living with their parents is at an exceptionally high level of 17.7%. Homeownership among households led by 30- to 34-year-olds has dropped from 57% to 47% since 2005.
People are waiting even longer to marry. From 2005 to 2014, the average age at first marriage increased 2.2 years for men and 1.7 years for women. For comparison’s sake, it took more than two decades in the past to move that needle as much as we have seen in the past nine years. Age of marriage is a key number for housing demand since married couples are much more likely to purchase a home.
These facts about millennials are immensely important to the positive story on housing. Millennials are the largest generation in U.S history — outnumbering even the baby boomers born from 1945 to 1964. The way they spend their money will have profound effects on our economy.
The baby boomers themselves will play a role in bolstering real estate prices. Morningstar’s data show that home ownership levels don’t begin to decline until about age 75. This leaves another 15 years until the bulk of the baby boomers begin to sell their homes in large numbers. This will further limit the supply of homes available for sale over the next decade.
While this data is a positive for the U.S. real estate market and our economy in general, there are several caveats. Those hoping for a return of the glory days of the early 2000s will be very disappointed. Tighter lending standards and banking regulations have made it much harder to get a mortgage.
In addition, we may have seen the bottom for mortgage rates. The Federal Reserve is about to begin raising interest rates. While nothing dramatic is expected, an eventual shift to more normal rates is expected to occur over the next few years. This makes a home more difficult to afford.
Historically, home prices have risen about 2%-3% a year over the past century. Ignore this data at your peril. Even if we see double the historic rate, It would mean about a 4%-6% annual rate of increase over the next decade. While that would be nice, it would certainly not make you rich. With inflation and other costs factored in, many could still be looking at a negative real return.
What should you do? If you are a first-time buyer, you should be in good shape. Another historic housing collapse seems to be a low-probability event. Buy a house to live in it, not as an investment you expect to make you wealthy.
Real estate is very regional, and you could see great swings in prices depending on what section of the country you live in. The bottom line, though, is that if you want to buy a home to raise a family in rather than to flip, there’s a pretty good chance you can do it without losing your shirt.
Put at least 10% down, lock in a plain-vanilla 30-year fixed-rate mortgage and get on with living your life. Don’t be under the illusion that you’ll turn into real estate mogul, and things should work out just fine.
This article also appears at Nasdaq.
Image via iStock.