Housing's supply and demand conundrum in 25 words or less.
"We could sell entry-level homes as fast as we could make them, all day long. It's building them that's the hard part."
That's the ceo of a top 15 home building enterprise in our Builder 100 speaking the other day. This exec and a few other very smart people were honestly having a difficult time deciding whether it's "supply constraints" or "demand constraints" that are the bigger pain points for residential developers and builders right now.
The housing recovery's valiant gains to date--in broad terms--mirror the gains and widening gaps in society as a whole, where capital's advantages have increased and labor's have not so much. Now, though, reports from the field in more and more markets is that momentum at the higher end of housing's pricing spectrum is running out of steam.
A slowing rate of price increases is by no means necessarily a negative. What it means in some respect is that price rigidity that shows up in broad trends may indicate that more action may be happening at lower price ranges than meets the eye. This is necessary and it's a positive. No single term or grouping is more meaningful when it comes to characterizing what needs to happen now and for the next duration of housing's recovery than the term Millennials. It's the catch-all for both a particular set of birth years that encompass 35-year-olds on the leading edge and 15-year-olds on the trailing edge.
Completely separate from those particular birth-year-defining populations, the term Millennials is the overlay to describe the economic force households of young adults should be exerting on the overall economy right now--some material portion of which is missing in action. Households are the engines of economies. They account for one of every three GDP dollars. When U.S. household formation, and jobs formation, and income formation, and the resulting consumer expenditure of households is humming, the U.S. economy is stronger. When one or more of these factors is off, then the U.S. economy squeaks, or sputters, or grinds along sluggishly. Right now, all things being equal, young adults own their homes at a rate about 10% lower than historical trends indicate they should. That's what all the worry is about right now, and that's got many people trying to solve the riddle of whether that has to do more with the lingering powerful economic hangover effects of the Great Recession, or more with household preference.
Dowell Myers, professor of Policy, Planning, and Demography at the Sol Price School of Policy at the University of Southern California, is leading a team of research experts to develop reports for Fannie Mae, specifically devoted to solving that riddle. Myers, too, is serving as one of the five Deans we have asked to lead our conversations at HIVE, on Sept. 28 and 29, at LA Live in Los Angeles, where over 700 thought and business leaders will gather to focus on the role innovation needs to play in addressing 5 great solvable challenges for housing today. Professor Myers plans to draw on insights from four separate reports he and his fellow USC research associates Gary Painter and Julie Zissimopoulos have been working on for Fannie.
"Housing needs millennials," Myers tells us, adding that the positive effects discretionary buyers--in many cases Baby Boom generation customer segments--have had on the housing markets over the past few years have run about as far as they can without a boost from first-time, younger-adult demand waves kicking into a higher gear. "Millennials are an essential part of a recovery's next leg, so much so that further recovery is at risk if they don't begin to buy. That's why we're working so hard to understand what's holding them back."
Wall Street Journal staffer Steven Russolillo has this piece on "Housing Market: Why Millennials are Getting Priced Out," which cites Redfin data on affordability issues as the broad-stroke muter of young adult buying behavior. Russolillo writes:
"A new study by national realtor Redfin found affordability was the biggest concern among all U.S. home buyers. The results were even more striking among Americans 35 and younger. One-third of surveyed millennials said the fact that “prices are rising or are too high” was their biggest concern. That was more than double the next biggest worry—competition."
Most of us look at the lag in young adult homeownership and home buying as a matter of timing, a series of economic consequences--slower job formation, higher student debt levels, weaker income growth--that have impeded normal household formation and behavior trends. Myers and his team have looked more closely, perhaps more closely than anybody at where the challenges and where the nearer term opportunity areas are to catalyze Millennials on a more targeted basis.
Here's one of his team's key findings, and it has to do with Millennials who get help from their parents:
We find the unconditional probability of transitioning to homeownership is increased by 23% among adult children who have received a transfer of at least $5,000 for any purpose from their parents in the past two years. Even after controlling for parental wealth and other parent and child characteristics, the probability of transitioning to homeownership still increases by 13.1% with receipt of a transfer.
So, in very real ways, Myers and his associates may begin to shed light on how to make a real dent in the 10% deficit in the rate of young adult homeowners. They're exploring, with precision, the relationships between homeownership among young adults and help from parents, homeownership rates of parents, incomes of parents, and educational attainment of parents to decipher which variables may be most susceptible to policy support.
Here's why Fannie is investing in the research by Dowell Myers and his associates:
This research project is part of Fannie Mae’s ongoing efforts to better understand and serve the housing needs of the large and diverse Millennial generation. This project focuses on the complex set of factors affecting Millennial home buying activity and homeownership attainment, which for a variety of demographic, social, and economic reasons have trailed prior generations. Of particular interest in this project are the roles that educational attainment and parental resources play in young adults’ achievement of homeownership. By funding research from leading scholars on the factors affecting the homeownership prospects of today’s young adults, Fannie Mae hopes to contribute new knowledge that can be used by the entire housing finance industry and by housing policy makers to expand mortgage credit access and homeownership opportunities for Millennials.
We're looking forward to hearing Dowell speak at HIVE to the insights he's discovering through his work, and explore how that data can work toward solving for the challenge of the 10% lag among young adults in homeownership rates.