One of the many interesting dynamics of the current housing market is the lack of new home sales and also, new home construction. New housing construction tends to be a boom for the economy across all income levels. Why? People when buying a new home also tend to fill the house with the general crap that occupies a place (i.e., new beds, stoves, microwaves, televisions, etc). This crap filling exercise sets off an avalanche of economic activity. You also have construction and the inherent supplies that go into building a new McMansion. Yet the new home buying audience in Millennials tends to be in a tighter economic position than their Taco Tuesday baby boomer parents. For these reasons we have an unusually large number of grown adults living at home with parents. It is highly doubtful that these grown adults are suddenly going to cause a surge in more expensive home buying. But the new home buying that is happening is going to a smaller group of people pushing prices higher on a small amount of inventory.
New home sales dynamics
With inventory in the market still being tight, it is surprising but not shocking that home builders simply are not out in the market aggressively building homes. You have this big group of younger adults but are they going to mimic the trend that followed the baby boomers? That is the big question and so far it doesn’t seem to be the case.
Take a look at this chart:
You would think with the price of new homes going up that builders would have an incentive to build. Yet new homes sales are still lagging. Adding to this, the months of supply is constrained:
This would seem like a simple enough reason to motivate builders to go out and create floods of new homes. But the big push is coming from metro areas that are already built out. Good luck trying to create a flood of new homes in San Francisco for example. Builders have a good sense and realize that there is simply little demand for new homes overall. Plus, they need to make money after factoring labor, materials, and other costs associated with building a new home. So future housing starts remain weak:
Builders are betting that many of these adults are either going to live at home for many more years or are going to move out into rentals. The rental bet by Wall Street has paid off big time. Of course Wall Street has pulled back dramatically in the last year from the rental bet. Not a bad move given we have added 10 million more rental households since the crisis hit and have seen a net loss in homeowner households. The new housing market is also a reflection regarding stagnant income growth across the country. The low interest rate play has already gotten all the juice it can get. The troubling thing is that the market is now fully accustomed to low rates (artificially low rates at that).
New home building and sales are a big part of fueling our economy. Yet this is not an ordinary housing market. It hasn’t been an “ordinary” housing market for probably 15 years. I’m fascinated by the impact this is going to have on a sociological level. There are many young adults living at home driving fancy cars but foregoing new homes. Apparently the symbol of wealth is not a McMansion but an iPhone 6 and a nice leased car.
If you really want to look at a truly robust recovery indicator, new home building is a good place to look at. So far, Millennials don’t seem to be rushing down the road to purchase new homes.