US home ownership is back at levels seen briefly in the mid-1980s, and before that in the mid-1960s. One key issue today is that while the US population is still growing, the younger population has quite a different profile from the Boomer generation, as the Pew Institute have reported.
- In 1980, only 1 in 10 young Boomers were still living at home with parents
- But today we are “going back to the future”, with 1 in 5 young adults living at home with their parents, due to economic pressures
In addition, there is a growing trend for retiring Boomers to reverse the “flight to the suburbs” that they undertook in the 1960s/1970s, and instead return to apartment living in the cities.
As the second chart confirms, these trends are steadily reducing the demand for single family homes. Multi-family units are now (as in the pre-Boomer SuperCycle era) around one-third of total housing starts, and are likely set for further increases. This is not good news for industries or companies focused supplying the housing industry, as it means they are being hit by 2 adverse trends:
- Contrary to policymaker promises, housing starts have not bounced back quickly to subprime highs. In fact, they are continuing to disappoint as the support for new home building from shale gas and oil-related development disappears as migrant workers return to their home state. This is a major reversal for petrochemical demand as the average new home uses around $15,000 of petrochemical products. At its peak (when housing starts reached 2.1m in 2005) the US housing market was worth $31bn to the industry
- Even worse from the demand viewpoint is that the SuperCycle trend towards single family homes has sharply reversed. Starts for apartment living have doubled as a percentage of the total back to around a third, equal to levels seen 40 years ago. This trend towards apartment living further reduces potential chemical and polymer demand. Although no detailed analysis yet exists on this factor, due to its relatively recent appearance, estimates suggest each apartment only uses around 50% of the materials required for a single-family home.
The combination of these factors has had a major impact on US home-ownership rates. These were given a major boost under President Clinton in 1995, when he introduced his major housing initiative as follows:
“The goal of this strategy, to boost home ownership to 67.5% by the year 2000, would take us to an all-time high, helping as many as 8 million American families across that threshold”.
This target was maintained by President George W Bush. And in the subprime bubble, home ownership rose beyond Clinton’s target to reach 69.2% in 2005. But it has since fallen back to pre-1995 levels and the current figure of under 64% equals 1964 levels.
A major part of the problem is simple affordability. Younger people are the key demographic for home buying, as they constitute the critical first-time buyer group. But Pew data shows that 92% of recent population growth has been in minority communities, whose earnings are generally less than those of the white population.
US Bureau of Labor Statistics data show that while average annual US earnings were around $42,000 in 2015, there was a wide variation between the main racial groups:
- Whites earned $43,000 on average, and Asians $51,000
- But Blacks earned $32,000 on average and Hispanics $31,000
This means that the average ratio of house prices to earnings of 9.0x disguises a wide variation. Whites are close to the average at 8.7x, while Asians are below it at 7.4x. But for the younger Black and Hispanic populations, which are critical for driving first-time home buyer sales, the ratio rises to 11.6x for Blacks and 12.0x for Hispanics, based on US Census Bureau data for new home prices.
Unsurprisingly, latest National Association of Realtors data show the share of first-time home buyers is now at its lowest level since 1987 at just 32%, having fallen for the past 3 years.
What are companies and investors to do? As the infographic below describes, they have a clear choice ahead:
- They can either hope that somehow new stimulus policies will succeed despite past failure
- Or, they can join the Winners who are now starting to develop new revenue and profit growth by adopting demand-led strategies
These are the issues that we focus on in the Demand – the New Direction for Profit study. And since we published this just 2 months ago, it has become clear that the risks of assuming stimulus programmes will deliver their promised results are rising all the time.
The best view is always from the top of the mountain. That’s probably why the outlook seems so promising for US auto and housing markets. Both appear to be doing well on the surface, but dig a little deeper and concerns soon emerge.
The chart above demonstrates the point, updating the data from my July post with the full-year outcome for 2014. It shows auto sales along the x-axis, and housing starts on the y-axis. The available data starts in 1973, and falls neatly into 4 different eras:
- 1973-84, very volatile, purple. High volumes in 1973, 1976-9, but crisis levels in 1974-5 and 1980-2
- 1985-98, very stable, green. Auto sales generally rising, whilst housing starts were plateauing
- 1999-2007, Y2K and sub-prime mania, red. Easy money pushed volumes to unsustainable levels
- 2008-14, slowing demand, blue. Low interest rates have supported auto sales, but housing remains slow
Back in July, there was already reason for caution. The long-term trend for housing and auto sales had clearly peaked some years ago for common sense reasons, due to the ageing of the BabyBoomers.
The Boomers are no longer buying new houses for the first time, as they are no longer settling down and having children. Nor are they fleeing race riots in the inner cities, and needing cars to drive to the suburbs. Instead, as Dept of Transport data confirms, they are driving fewer miles as they age.
And there is no obvious replacement for their buying power. Of course, the US population is still growing, but the younger population has a quite different profile from the Boomer generation, as the Pew Institute have reported:
- In 1980, only 1 in 10 young Boomers were still living at home with parents. But today we are ‘going back to the future’, with 1 in 5 young adults living at home with parents due to economic pressures. This reduces the need for single family homes, and instead means multi-family units are now (as in the pre-Boomer era) around one-third of total housing starts
- Since 2000, an astonishing 92% of population growth has been in minority communities. And whilst the White population has a median age of 42 years (very similar to that of Europe and Japan), the median age of Blacks is 33 years and for Hispanics just 28 years. This matters in terms of housing and auto markets, as Blacks and Hispanics earn much less than Whites, and have much higher levels of joblessness
Thus the auto market is already seeing the first signs of strain, as the Wall Street Journal reports:
“More than 8.4% of borrowers with weak credit scores who took out loans in the first quarter of 2014 had missed payments by November”
OIL PRICE COLLAPSE WILL HIT HOUSING STARTS, AUTO SALES
Today, there is even more reason for caution, given the collapse of the oil/shale gas bubble. Back in Q3, probably most people disagreed with my forecast that oil prices were about to see a major collapse. But today, major lay-offs are taking place across a variety of industries, as companies rush to adapt to the New Normal world of energy prices:
- This will inevitably reduce housing starts, as workers will no longer be moving to new oil/gas-related jobs
- It will also reduce auto demand – not only from builders for pick-up trucks, but also from laid-off oil workers
The last oil price collapse in 1986 hit Houston, Texas (where I then worked), very badly. Many people lost their jobs and left the state penniless, even posting their house keys back to the bank as the mortgage payment had suddenly become unaffordable. This will likely happen again, right across the oil’/gas belt.
In addition, many will have to return their cars, due to the rise in auto leasing. 27% of new car sales last year were leased, not bought, versus 22% in 2012 and just 17% before 2005. But it is hard to maintain the typical $199/month payment if your job has just disappeared.
We now have full US Census Bureau data for housing starts in 2014, which shows:
- Starts returned to the 1m level for the first time since 2007
- They were also nearly double the low of 554k seen in 2009
- But at 1.006m, they were less than half of the 2.068m peak in 2005
The data also confirms the dramatic swing away from single-family homes towards multi-family apartments. These were one-third of total starts in 2014, around double the average seen between 1989 – 2007, and back to levels last seen around 40 years ago – before the BabyBoomer home boom began.
The data is also a sign of the overall decline in home ownership levels, which at 64.4% are back to 1995 levels, when records first began. As with employment, there is also a major divide between ownership rates for the relatively wealthy White population at 72.6%, and those for the poorer Hispanic (45.6%) and Black populations (42.9).
Equally significant is the data for the major regions in the US since 2009, as the chart above shows:
- The largest gain has been in the South, which averaged 500k starts in 2014 versus 260k in 2009
- The West also saw a large percentage gain, with starts doubling to 235k in 2014 versus 115k in 2009
- Gains in the North East and Mid-West were more modest at 50k and 65k respectively
As the map from the US Energy Information Agency on the right shows, 3 of these regions have also seen strong growth in oil/shale gas-related activity.
It highlights the 7 most prolific areas, responsible for all domestic natural gas production growth, and 95% of all domestic oil production growth, between 2011-2013.
Clearly it would need more detailed study to directly link this data with growth in housing starts. But we do know that workers have flocked to these regions in search of jobs.
Separate Census data shows that Houston had the 2nd fastest growth in population in 2013 (after New York), and Texas had 3 of the top 10 cities in the list of fastest growing cities.
And according to the Census, Texas added more housing units than any other state as a result.
But now, the boom is turning to bust, and companies are laying off workers – particularly in labour-intensive areas such as drilling and support services. Major job losses are already underway at Schlumberger and other key employers.
We won’t know till March or April just how bad the hit will be to housing. But it seems more than likely it will end the recent recovery in housing starts, taking 2015 levels back below the 1m level again.
As promised yesterday, the blog today looks at the wider impact of the major changes underway in housing markets. Driven by the ageing BabyBoomers these changes are, in effect, like throwing a series of large stones into the middle of a pool of water – the ripples spread wider and wider as the impact grows.
One key change, as the Pew Institute continues to report, is that the US is steadily moving back to high levels of multi-generational homes:
- As many as 1 in 4 young adults were living at home in 1950.
- But by 1980, only 1 in 10 young Boomers were still living at home with parents.
- Today we are ‘going back to the future’, with 1 in 5 young adults living at home with parents
- And their numbers are rising all the time.
This has wider implications as housing is also a motor for other parts of the economy. Multi-family units require only half the number of people to build them – 1.8 people are employed to build each multi-family, versus 3.7 for a single family home. They also use less material when being built – bad news for the chemical industry, for example, when each new single home uses $15k of chemicals, according to American Chemistry Council data.
Unsurprisingly, US house prices are beginning to weaken again as the impact of stimulus policies disappears. Last week’s S&P Case-Shiller Index showed average prices in the 10 largest cities back at September 2013 levels. And the outlook is not good, with affordability being hit with mortgage rates now at 4.5% versus 3.6% last May.
Thus mortgage lending fell in Q1 to a 14-year low, leading to talk of a shakeout getting underway in the mortgage finance industry. As the CEO of the Mortgage Bankers Association warned:
“This change is much more structural and will be longer lasting. It’s a classic supply-and-demand scenario. We have an excess supply of lenders and a lack of demand.”
Equally important, as the chart shows, is that the changes taking place in housing markets (red line) are likely to impact new auto sales (blue line). These markets have moved in parallel over the past 40 years, and it is already possible to see what is likely to happen:
- One obvious point of connection is that “as we age, we driver fewer miles“, as the US Dept of Transport notes
- Their data shows those aged 74+ drive 60% fewer miles than those aged 34 – 43
- Not only do the kids no longer need a taxi service, but retired people no longer need to drive to work
It is also becoming clear that we are only in the very early innings of these changes. One key trend, as the blog will discuss tomorrow, is that older Boomers are now choosing to move back into cities in large numbers.
Companies that missed the first wave of these changes are already on the back foot. They need to catch up quickly, before they are completely left behind.
THURSDAY EVENING UPDATE: 43% of US homes were bought with cash in Q1, according to RealtyTrac. This was more than twice the 2013 level, and confirms not only the shakeout now underway in mortgage lending, but also the weak outlook for housing itself. First-time buyers are being priced out of the market, and can’t easily get mortgages as they are more likely to belong to lower-earning minority communities.
US housing demand used to be a major support for the US economy. But that was in the days when millions of new BabyBoomer families wanted to set up home in the suburbs and raise a family. The rule was simple – if prices were high, you just drove 10 miles down the freeway to find a new suburb where home prices were $10k cheaper.
But today, the kids have left home, and the Boomers are entering retirement. So they don’t need family homes in the suburbs any more. And falling fertility rates mean there are not enough younger families to replace them.
Equally important, as the blog discussed back in February, is that the real picture is actually worse than the headline view. The highest fertility rates today are in the low-earning Hispanic and Black communities – which means the recent temporary recovery in home prices has simply made owning a home even less affordable for them:
- Latest Census Bureau data shows only 46% of Hispanics, and 43% of blacks own their own home
- By comparison, 73% of White non-Hispanics own their home
Thus it is really no surprise that home ownership rates hit a new low in Q1 at 65%. This was back at the 1995 level – when the youngest Boomer families were still setting up home for the first time.
Equally, it is no surprise that the US economy finds it hard to grow at SuperCycle rates, as the New York Times notes:
- Annual household formation halved to just 569k between 2007-2013, from 1.35m between 2001-2006
- Residential investment as a share of the economy is around half its average post-War level
- On its own, this has reduced GDP growth by around 2% compared to the pre-2008 period
Instead, the need for cheaper multi-family units continues to rise. These are now 34% of total sales – a level not seen since 1984. But it was common before 1975, when the oldest Boomer was only 29 years old. As the Wall Street Journal notes:
“Growth in rental demand is combining with long-run demographic trends that are expected to continue to tilt U.S. home construction toward “multifamily” units, a category that includes everything from garden-style apartments to towering condominiums. The baby-boom generation is moving into retirement and empty-nesthood, prompting many to downsize to smaller quarters. The generations behind them, meantime, are having fewer children, later in life, so need less space.”
The impact of today’s demographic changes is fundamental to the potential growth rate for the entire western economy. The reason is that today’s changing demographics ripple outwards. Housing demand itself is key for other major industries such as autos and chemicals, as well as for employment itself.
The blog will therefore discuss these areas in more detail tomorrow.
US house prices were the original cause of the financial collapse in Q4 2008. Since then, the politicians have failed to grasp the depths of the problem. Now, the housing market seems about to start on a new downward leg.
The chart shows that prices hit a new low last month, down 33% from the May 2006 peak. The 10-city composite was down 1.1% versus September, and 3% versus a year ago.
The issue is not affordability, given current low interest rates and recent price falls. Rates are just 3.91%, the lowest since records began in 1971. Its rather that housing is in transition to the New Normal described in our free ‘Boom, Gloom and the New Normal’ eBook:
• 2011 single family home sales will be the lowest on record at only 300k
• Housing starts are only 687k, compared to 2.27 million in January 2006
The key, as Bloomberg notes, is that:
“Owners of more than 14 million homes are in foreclosure, are delinquent on their mortgages or owe more than their houses are worth, creating a shadow inventory that is holding down sales and prices”.
Equally, as we describe in chapter 8 of the eBook (to be published at the end of January), underlying US housing trends have changed:
• Young people can no longer afford to move out of the parental home
• Older people, who are living longer, cannot afford residential care
• ‘Multi-generational housing’ is therefore the new growth sector
Lennar, the US’s 3rd largest home builder, is now marketing its range of “Next Gen homes within a home”. It is the first mass-market builder to spot this emerging trend.
The problem is the transition period is likely to be difficult. The recent pause in foreclosures only stabilised the market. Now, it seems set to fall again as foreclosures begin to increase again.