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.