The Mortgage Corner
The Federal Reserve’s Open Market Committee has just announced it is raising short term interest rates by ¼ percent. Its press release said: “Given the economic outlook, and recognizing the time it takes for policy actions to affect future economic outcomes, the Committee decided to raise the target range for the federal funds rate to ¼ percent to ½ percent. The stance of monetary policy remains accommodative after this increase, thereby supporting further improvement in labor market conditions and a return to 2% inflation.”
This is at the same time that privately-owned housing starts in November rose to a seasonally adjusted annual rate of 1,173,000, reports the U.S. Census Bureau. This is 10.5 percent above the revised October estimate of 1,062,000 and is 16.5 percent above the November 2014 rate of 1,007,000. It’s a huge number, and has to be a sign that household formation is picking up from the lows of the Great Recession.
Much of the construction surge is fueled by the millennial generation in particular leaving home and beginning to form new households. The interest rate boost may not affect construction, as longer term rates are set by bonds, such as the 10-year Treasury Bond which remains at historical lows.
Single-family housing starts in November were at a rate of 768,000; this is 7.6 percent above the revised October figure of 714,000. The November rate for units in buildings with five units or more was 398,000.
“Single-family production this month has reached levels last seen before the Great Recession, an indicator that we are making gradual headway back to a normal housing market,” said NAHB Chief Economist David Crowe. “As we close out the year, we can see that the housing sector has made headway in 2015, and we expect the recovery to continue at a modest pace.”
Higher household formation among 20-year olds is an early sign that millennials are coming into the housing market in force. Demographic Intelligence, according to the Wall Street Journal, has analyzed the marriage data on millennials. Demographic Intelligence predicts that ultimately about 60 percent of the children of millennials will be born to married parents, up from about 45 percent today.
“The narrative about millennials has been they’re putting parenthood before marriage, never going to get married,” said Sam Sturgeon, president of Demographic Intelligence, based in Charlottesville, Va. “Now that the cohort is in the middle of their 20s, from here on out you’re going to see a lot of millennial marriages and a lot of millennial married births.”
Millennials, those that most demographers say are born between 1980 and 2000, are the largest and most diverse generation in U.S. history. Earlier this year, they became the largest generation in the U.S. labor force, surpassing Generation X, those ages 35 to 50, according to the Pew Research Center.
Household formation has picked up at the same time, though UC Berkeley’s Terner Center For Housing Innovation says most of the new households are being formed by seniors. Despite expectations that millennials are the force behind household formation, older adults are driving household formation. Strikingly, age groups younger than 55 collectively had negative household formation between 2014 and 2015, while 65-74 year-olds accounted for more than two thirds (860 thousand) of overall household formation.
Graph: UC Terner Center
And privately-owned housing units authorized by building permits in November were also much higher, at a seasonally adjusted annual rate of 1,289,000, signaling higher new-home construction for next year as well,. This is 11.0 percent above the revised October rate of 1,161,000 and is 19.5 percent above the November 2014 estimate of 1,079,000.
Combined single- and multifamily starts rose in the South and West, with respective gains of 21.3 and 6.3 percent. The Midwest was unchanged and the Northeast fell 8.5 percent.
So who is right? The Berkeley study said the seniors are forming more households because 65-74 year-olds are the fastest growing population group at present. But that can’t last as mid-20 year-olds will soon be the largest population segment. And their sample is just through mid-2015, so millennials could begin to show more numbers for the rest of 2015.
Regardless, this will continue to boost housing construction, and Demographic Intelligence maintains that 4 million ancillary jobs are created with every 1 million new homes that are built and sold.
Harlan Green © 2015
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