We hear it everyday in the housing markets, millennials, millennials, millennials. The world continues to contour itself around the millennial effect as they make up the largest population as the baby boomers, slowly, phase out.In my opinion, this reliance is prevalent in tech, consumer goods, and housing.
In regards to housing, multifamily really took off on the basis of the world turning to renting for a plethora of reasons, but also because over 75M individuals between the age of 18-34 and about 66M GenX’ers. I argue that GenX is an important age group to keep tabs on as they range from the ages of 35-50 and had to rebuild their lives mid career during the late 2000s because of the financial crisis which may have led to delayed child bearing as well as home purchases.
Couple this with the fact that 70% of students coming out of college average $35,000 in debt (which represents a $2000 increase from 2014), and it’s easy to see why millennials living in their parents home. The chart below depicts the consistent uptick in 25-34 year olds living in their parents’ home.
The above trend will not relent until wage growth, on an annual basis, surpasses the increasing cost of housing and student debt for this generation. I think we’re closing in on rent growth that will be closer to 2-3% instead of robust 4-6% based on supply & demand economics. In other words, we need to see wage growth closer to 3% and a slower rise in cost of tuition as well as continued low interest rates so student loans and mortgage rates to remain low which will allow for the basement dwellers to walk up the stairs and out the front door..
In terms of wage growth, the job market has improved, however, the quality of the work has been subpar; many jobs have been in the service sector, and while the minimum wage hikes will benefit these lower wage earners, they still are a far cry from what Americans need to earn to rein in these diverging paths in the housing market. Goldman noted this in their December commented on this in a fall publication, “The share of young adults living with their parents has risen about 4 percentage points (or 3 million individuals) since house prices peaked in 2006. The share of “children in the basement” has not come down recently despite significant improvements seen in the job market (Exhibit 1). The higher youth at home rate has depressed household formation and housing demand.” What’s missing is that while low unemployment holds true, the quality of life continues to dwindle for most of America as their employment opportunities are not what they were 15 years ago.
The two charts below speak volumes in regards to the above point.
In my opinion, we need to see fundamental growth in the US job market and changes to combat the rapid rise in higher education. Maybe the key is more trade schools instead of traditional four year colleges, further investment into employee training to adapt them to the rapidly changes in technology instead of stock buybacks by companies, however, the important statistic to keep an eye on is the household formation and absorption rates of all the housing inventory coming onto the market in 2017. According to research by CBRE, supply will comfortably exceed demand. The supply should be absorbed over the course of the next 18-24 months if the above see a shift in the pattern.
However, we’re entering the 8th year of this bull cycle, and while Lawrence Fink and Tom Lee, of Blackrock and Fundstrat, respectively, are big believers in the continued growth in the US, I remain hesitant of beyond 2016/early 2017 as corporate profits slow down based on global growth, US, high yield markets in carnage (with no clear bottom in sight), and the employment figures, while good, are worrisome on a macro level.
Yes, these basement dwellers will begin leaving the nest and eventually form households, however, another slowdown in the U.S. economy could lead to a substantially higher number of millennials living with their parents and further amplify the supply imbalance which will come to the market thus decreasing prices. (remember, builders always overshoot demand which leads to peaks and eventual downturns in the housing market-see chart below via zero hedge).
