The Mortgage Corner
The Commerce Department just reported that homeownership rate rose to 63.7 percent in the third quarter, from 63.4 percent in the second quarter, reports the National Association of Realtors. That is still well below the high of the series, of 69.2 percent in the second quarter.
But things may be starting to change, as the home ownership rate for those under age 35—the so-called millennial generation of those aged 18 to 36–increased from 34.8 percent to 35.8 percent in the third quarter. That marks the largest gain for that population since the second quarter of 2004. Also, it was the only age cohort that posted a significant increase in the home ownership rate in the third quarter.
Why? They are the largest population generation, even topping their baby boomer parents in numbers. And many have been renting until now, but it looks like their job prospects have brightened, while rents are increasing some 8 percent per year due to the overall housing shortage. So why not take advantage of the tax deductions that come with home ownership?
Most economic forecasters have remained fairly optimistic about the job market for millennials in the coming years, reports the Wall Street Journal. The Federal Reserve and Congressional Budget Office, for example, expect the unemployment rate to continue to fall in the years ahead. In its most recent round of forecasts, the Fed thinks the jobless rate will settle in at between 5 percent and 5.2 percent. The CBO is somewhat less optimistic, projecting unemployment will fall a little further from where it is today, but that from 2018 to 2025 it will, on average, be a little bit higher than the Fed’s estimate, at about 5. percent.
“If the CBO or Fed are close to correct, the first 10 years for today’s graduating millennials would be the best for the entire generation so far,” says the WSJ.
The result of the increase in home buying is that September existing-home sales soared to a 5.55 million rate, highest since 2007 at the end of the housing bubble. But this is putting pressure on inventories, as total housing inventory at the end of September decreased 2.6 percent to 2.21 million existing homes available for sale, and is now 3.1 percent lower than a year ago (2.28 million). Unsold inventory is at a 4.8–month supply at the current sales pace, down from 5.1 months in August.
Graph: Calculated Risk
This is much too low, and leaves many prospective homebuyers out of the market, especially at the lower-price, entry level. It is reflected in just released lower pending home sales for September. Pending home sales cooled for the second straight month and to their second lowest index reading in 2015, said the National Association of Realtors. All four major regions experienced a pullback in activity in September.
The Pending Home Sales Index, a forward–looking indicator based on contract signings, declined 2.3 percent to 106.8 in September from a slightly downwardly revised 109.3 in August but is still 3.0 percent above September 2014 (103.7). With last month’s decline, the index is now at its second lowest level of the year (103.7 in January), but has still increased year–over–year for 13 straight months.
Lawrence Yun, NAR chief economist, says a combination of factors likely led to September’s dip in contract signings. “There continues to be a dearth of available listings in the lower end of the market for first–time buyers, and Realtors in many areas are reporting stronger competition than what’s normal this time of year because of stubbornly–low inventory conditions,” he said. “Additionally, the rockiness in the financial markets at the end of the summer and signs of a slowing U.S. economy may be causing some prospective buyers to take a wait–and–see approach.”
And that is why the Federal Reserve just announced after its October FOMC meeting that it would not raise their interest rates. “The Committee continues to see the risks to the outlook for economic activity and the labor market as nearly balanced but is monitoring global economic and financial developments. Inflation is anticipated to remain near its recent low level in the near term but the Committee expects inflation to rise gradually toward 2 percent over the medium term as the labor market improves further and the transitory effects of declines in energy and import prices dissipate.”
NAR chief economist Lawrence Yun remains optimistic. “With interest rates hovering around 4 percent, rents rising at a near 8–year high, and job growth holding strong — albeit at a more modest pace than earlier this year — the overall demand for buying should stay at a healthy level despite some weakness in the overall economy.”
Most economic forecasters have remained fairly optimistic about the coming years. The Federal Reserve and Congressional Budget Office, for example, expect the unemployment rate to continue to fall in the years ahead. In its most recent round of forecasts, the Fed thinks the jobless rate will settle in at between 5 percent and 5.2 percent. The CBO is somewhat less optimistic, projecting unemployment will fall a little further from where it is today, but that from 2018 to 2025 it will, on average, be a little bit higher than the Fed’s estimate, at about 5.4%.
If the CBO or Fed are close to correct, the first 10 years for today’s graduating millennials would be the best for the entire generation so far. But aren’t the Fed and the CBO always wrong about the economy, you might ask? That’s a fair question. They haven’t done a good job predicting turning points, and they majorly missed the severity and length of damage from the 2007-09 recession.
It will be up to the millennial generation to push for economic and social policies that protect their interests, as with past generations. Fortunately, a labor-friendly Federal Reserve under Janet Yellen is doing just that, in keeping interest rates this low. It gives this largest adult generation a chance to gain that foothold so necessary for future prosperity.
Harlan Green © 2015
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