In 2016, there were plenty of social media battles. The #howtoconfuseamillennial was one of the more entertaining, but it hit a few important points along the way. Mostly, the millennials continued to push their narrative that the housing market and general economy have been forever ruined by previous generations.
As is common, this shows just how much the younger generation still needs to learn about economics. In terms of housing, things are more promising and interesting than such a simplistic outlook can comprehend.
Today’s Numbers
There are a few metrics that are in stark contrast to their gloomy narrative. Home values are at an all-time high, which shows that they have more than completely recovered from the 2008 crash. On top of that, sales are also back above pre-crash numbers (several short-term spikes are higher than present levels, but the long average is as high as any).
This combinations of factors caused the housing market to be responsible for a total GDP growth of 1.1 percent in 2016. When you consider the growth for the year was around 2.9 percent, this shows just how important the housing market it, and how much it has recovered.
The interesting part of the recovery is that overall homeownership rates are actually in decline. This has to do with two factors. First, homeownership is increasing more slowly than the overall population. Second, the driving force of the recovery has actually been luxury homes. Values have improved across the board, but it is remodels, renovations and high-end homes that have led the charge.
The Trickle Up Effect
If the picture seems a little complicated right now, you aren’t the only one confused. A luxury-led housing recovery actually defied the expectations of most economists during the height of the recent recession.
The interesting side-effect of this uncommon recovery is what some have dubbed the “trickle up effect.” Essentially, the overall value of homes is on the rise. This makes investing in housing a better bet, and that creates a feedback loop. Even though homeownership rates have declined, the trends are starting to head the other way, and they are following the increases in housing value.
There’s a second part of this feedback loop. As homeowners have more confidence in the enduring value of their homes, they are more willing to spend money and make riskier investments. This has largely been correlated with a recent resurgence in retail. To put it simply, since homes are once again a reliable investment, consumer confidence is following, and it is good for the economy overall.
This is made more obvious by the fact that the average size of American homes is accelerating. While the millennial generation is being slow to jump into the market, the people who are investing are doing so with larger commitments than ever before.
Keep in mind that all of these changes have happened while oil prices are down. While it may not seem obvious, higher oil prices generally create more liquid assets in the country, and traditionally, housing investments are higher when oil prices are higher. That this recovery has happened in spite of oil prices suggests that it is much more sustainable than it appears. It also suggests that there is potential for a housing boom.
Anticipating the Market
For now, the time is prime to buy a house. It is still too large an investment for most Americans to do haphazardly, but it’s a reliable way to increase net worth. The uncertainty in oil could prevent a true boom from occurring, but the stability so far suggests that the market will grow regardless of oil prices. The more important consideration is interest.
So far, the Fed has been raising rates with extreme caution, and they consistently act below the expectations they keep setting. This has left mortgage rates extremely low, and it is certainly an incentive to purchase sooner rather than later. While some speculate this is part of what has pushed housing development, the truth is that more aggressive actions from the Fed will likely push purchase rates up quickly.
The other big factor is the cost of construction. Overregulation and skilled labor deficiencies are the primary source of a supply-side constriction on new housing. If the Trump Administration can make the changes they want, and if the sudden rising trend in labor force participation can continue, then housing development will drop in cost and further boost the market.
Overall, the economy has not come anywhere close to meeting its potential. While the uninformed will blame previous generations, the last few months have made it abundantly clear that the stagnations was mostly caused by the previous administration. The housing market is remarkably healthy, and it is primed for explosive growth.
Regards,
Ethan Warrick
Editor
Wealth Authority
