The Mortgage Corner
What should happen to U.S. housing in 2016, with interest rates at record lows and a healthy job market? Much will depend on population growth, and in particular the newest largest generation of all—the millennials, or Gen Y’ers, 18 to 35 years old and born somewhere between 1980 to 2000, say most demographers. They are finally beginning to move out of their parents’ homes—50 percent of them at last count.
And that is why we are seeing the huge jump in household formation, the main driver of housing growth. A missing ingredient needed to bolster the housing recovery has been a stronger pace of household formation—which is beginning to pick up after eight years of running at low levels, according to CoreLogic Chief Economist Frank Nothaft in the company’s recently released September MarketPulse.
The Great Recession of 2008, with its many job layoffs or employment losses, caused many young adults (and others) to either move in with relatives or share housing with roommates rather than get their own home. As a result, household formation rates fell to their lowest level since the end of World War II.
That trend might be reversing, Nothaft said. In the first half of 2015, the number of new households grew by 1.7 million from the same period in 2014, the largest growth experienced in a decade. Labor market improvements have also played a role in the recent acceleration in household formation, according to Nothaft.
“As the job market has improved, many millennials now have the financial independence to form their own household, and we anticipate that the pent-up desire of young workers to live on their own will sustain household growth of about 1.2 million per year, on average, for several years,” Nothaft said, citing a report from the Joint Center for Housing Studies at Harvard University that forecasted new household growth of between 11 million and 13 million over the next decade depending on the pace of immigration in the United States.
The result is that adult millennials, who will total more than their parent baby boomers by 2020, are boosting household formation. And they also ‘own’ the labor force, with more than 53.6 percent of those that are working or looking for work in Q1 2016 and growing, according to PEW Research.
And interest rates are at or below historical levels, especially mortgage rates, which will continue to boost housing growth this year. The 30-year conforming fixed rate has plunged as low as to 3.25 percent in California, with 1.5 originations points, on a given day.
Fed Chairman Janet Yellen is sounding more dovish about the need to raise rates further, as oil prices have plunged, keeping inflation at bay. Yellen reiterated on Wednesday that the Fed expects to have “gradual” interest rate increases. The Fed’s committee meets next in mid-March. But many experts doubt that a March rate hike will happen because other central banks are moving in the opposite direction.
For instance, Japan’s central bank recently introduced negative interest rates, China’s central bank has spent hundreds of billions to prop up its currency and the European Central Bank could soon increase its stimulus program.
Harlan Green © 2016
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