US housing stands on firmer ground (Archived)
By Henry Hoare, BNY Mellon IM EMEA
With the US housing economy still in recovery mode more than six years on from the peak of the financial crisis, what do the coming years have in hold for US housing and what role do the so-called ‘millennials’ have to play in this story? Carl Guerin, research analyst and Raphael Lewis, primary research analyst on The Boston Company’s1 US Opportunistic Equity team, discuss.
The US housing economy is still in the midst of a healing process. From housing starts (the number of new residential construction projects that have begun during any particular month), vacancy rates, house prices, to all matter of other housing data, the numbers suggest the US housing economy is still some way from its mid-2000 peak levels. Is this a result of the scars of the financial crisis (on both the consumer and business levels), the reticence of the so-called ‘millennials’ or that the peak years of the 2000s were simply abnormal and unsustainable? It seems likely the truth lies somewhere between these three factors.
From annualised levels in excess of two million in the early 2000s – peaking at 2.3 million in January 2006 – US housing starts plateaued throughout 2014 at around the one million mark. “There has been plenty of discussion among investors and forecasters as to a more reasonable and likely range over the coming years: one million seems too low but the peaks of the last decade seem too high. A 1.2 million to 1.5 million range seems appropriate,” explains Guerin.
“This is a slow burner and we aren’t expecting to see the kind of ‘snapbacks’ witnessed in the mid-70s and early 80s and 90s. The post-crisis years have been dominated by lesson-learning; regulation has increased, lending rules have become stiffer.” Ultimately, the appetite for housing risk has diminished noticeably. “The peak of the mid-2000s was a function of heavy speculation on an asset traditionally seen as an ‘easy’ source of wealth accumulation. With their fingers burnt, it seems unlikely the US consumer will return to that way of thinking anytime soon,” adds Guerin.
That’s not to say there haven’t been improvements in the underlying housing market. Negative equity numbers have benefited from price inflation while foreclosures were down 35% year-on-year to June 2014, according to real estate data provider CoreLogic. The consensus opinion is that much of this was driven by speculative builds in the 2000s; these have fallen significantly in number since the crisis.
Bearing the scars
Many commentators believe one of the key reasons behind the slower-than-anticipated demand for housing rests at the feet of the so-called ‘millennials’ – defined as those born between the early 1980s and early 2000s. Marrying later, having kids later, saddled with student debts, living with parents for longer, much thought is being given to how this demographic can be encouraged to buy into a traditional path that has dominated US life for the past century. It remains the billion-dollar challenge.
Ultimately, are ‘millennials’ shying away from home ownership because of economic reasons, psychological reasons or just because they are a culturally different group of people from the rest of the US population? “The so-called ‘sharing’ generation is re-shaping the market; for example, home-improvement retailers don’t just have to worry about people sharing houses, they also have to worry about people sharing hammers,” says Lewis. There is also the challenge of sky-high student debt levels with which to contend. Indeed, the share of 25-34 year olds with more than US$50,000 of debt tripled between 2001 and 20102. “Clearly, indebtedness is a challenge. But improvements in education mean students will now enter the workforce better qualified and equipped than the classes of the recent past. They are also contending with the psychological scars of the financial crisis although the further the crisis disappears in the rear-view mirror, the less snake-bitten this generation will be,” he adds.
There are also positive signs in the job market, as the unemployment rate has continued to fall, which will ultimately push wages higher. This is especially true for college graduates, who have been able to find jobs more readily and earn higher salaries than their less-educated counterparts in this recovery. Another promising development is the groundswell of public protest against the ballooning costs of higher education. As a result, the US government has begun to implement some pockets of debt relief and to consider greater regulation of for-profit schools. According to the US Department of Education, students at for-profit colleges make up about 13% of the total higher-education population, but represent about 31% of all student loans and almost half of all loan defaults.3
Staying in credit
Lewis says: “As far as the problem of credit availability is concerned, much of the debate in the US has been centred on getting more creative, of using the vast swathes of data available to understand and properly evaluate the nature of risks; lending should be less broad brush. The key is to use data in a smarter and more efficient way and ‘millennials’ should be the beneficiaries.”
Banks and other housing-related businesses have cited a desire for more regulatory and legal clarity to free lenders from the uncertainty restraining their mortgage businesses. “But at the same time, progress has already been made and the positive news is starting to come in. The nation’s largest banks have struck a series of landmark, multi-billion-dollar legal settlements with the federal government for alleged misdeeds during the peak bubble years, removing some doubt,” Lewis adds. In late 2014 US Federal Reserve Chair Janet Yellen expressed sympathy for the banks’ frustrations and pledged to clarify the rules around mortgage lending to foster a greater extension of credit. “This is not likely to be a fast process but it’s a sign that we are due to see better days,” he adds.
“As for the major forces holding back the ‘millennials’ from US housing, they are a combination of psychological and economic – the scars of the post-crisis years coupled with the pain of the present. The good news is it’s hard to imagine the situation getting any worse – it should ameliorate over time,” says Lewis.
Like with any bubble and the ensuing burst, lessons have been learned (for a while at least), according to Guerin. “It seems unlikely we’ll see another housing crisis in the next 10 to 20 years. The scars of the past 10 years will provide a constant reminder to the ‘millennials’ and beyond. But, of course, it’s a fact of life that different mistakes will be made in the future.”
Some commentators argue the post-crisis years have been dominated by over-conservatism, or that this conservatism has continued for longer than required. “It is no surprise the government and banks are working to sensibly loosen lending criteria,” says Guerin. “The pendulum, which had swung too far the other way, is being righted. It is a welcome change that solid supply and demand factors are starting to drive the housing economy; we are not seeing a return of the speculative 2000s. It is also a welcome change that the importance of US housing to the broader economy is less now than it was. A generational and cultural shift is underway and this is a good thing.”
Average between 31 December 1984 and 30 September 2014 was 1.372 million.
1. Investment Managers are appointed by BNY Mellon Investment Management EMEA Limited ("BNYMIM EMEA") or affiliated fund operating companies to undertake portfolio management activities in relation to contracts for products and services entered into by clients with BNYMIM EMEA or the BNY Mellon funds.
2. Harvard University Joint Centre for Housing Studies, June 2014.
3. Obama Administration Takes Action to Protect Americans from Predatory, Poor-Performing Career Colleges, U.S. Department of Education, March 14, 2014.