In this month's edition of Builder magazine, economist David Crowe penned an article titled "Gen X Prefers to Rent." In the article he describes today's reality for homeownership in the U.S, and as you may have already surmised, Crowe's description is pretty bleak.
Here are six facts Crowe cited that, when taken together, paint a challenging but optimistic picture for the future of housing in America.
1. Gen Xers and millenials aren't ready to settle down
In the article, Crowe points to the all-time low birth rates currently seen in the U.S., and to marriage rates that he claims are the lowest observed in a century, as being big drivers in the decline in new home sales.
By delaying family life, younger Americans are also delaying planting the stable roots to support a family. With no reason to plant roots, Americans are less likely to buy and more likely to rent.
2. More young people are moving back in with their parents
In the 20 years preceding the Great Recession, 10% to 12% of adults aged 25 to 34 lived with their parents. This trend began creeping up in 2006, reaching an astonishing 19% by 2011. The implication here is obvious: If young people are living with Mom and Dad, they aren't buying a new home.
3. Even the young people not living with Mom and Dad aren't buying
The eight-year period ending in 2012 saw the percentage of Gen Xers renting rise from 50% to 58.5%. Crowe points to a 1.3 million-person decline in the number of homeowners coupled with a 1.7 million-person increase in the number of renters. That's a 3 million-person swing in the market, most of which is felt in the critical first-time homebuyers segment.
4. The market for first time home buyers has dried up
First-time homebuyers are a critical sales channel for builders. It doesn't matter if the builder is a local contractor with 15 houses on the market or a national player such as Pulte Group (NYSE: PHM ) or Toll Brothers (NYSE: TOL ) with a combined $14 billion market cap.
According to Crowe, in historical markets first-time homebuyers represented about 30% of sales for the typical builder. Today that number is closer to 20% -- a huge decline and major problem for those who work and invest in the industry.
5. There are a multitude of economic reasons conspiring to drive young homebuyers away ...
Unemployment among young people is a major problem. Without stable income, a potential buyer can't qualify for a mortgage or save up cash for a down payment. Tight credit standards are only exacerbated by high student-loan balances that put new graduates into a financial hole before they can even begin their career.
Even the combination of a burst bubble that's annihilating market prices and generational low interest rates hasn't been enough to get young buyers to the closing table. Looking into 2014, the bond markets are preparing for rates to rise at the same time as home prices are rebounding. Buying a home will soon be much more expensive than it is today.
6. ... But relief seems to be just around the corner
Despite all the reasons to be pessimistic about the future of housing, Crowe concludes with optimism.
Crowe says unemployment rates for Gen Xers have recently improved to match the rate for the general population, a metric it had trailed by about 100 basis points in the years immediately following the recession. As banking regulations become more clearly defined and economic fundamentals slowly improve, banks will likely ease credit standards to levels similar to what was practice in the 1990s and early 2000s. As young workers get to work, begin saving, establish their creditworthiness, and begin to settle down, the housing market should at long last return to its historical standing.
The housing market and homebuilders aren't out of the woods yet, but there are encouraging signs for the future. Today there are 42.5 million Americans aged 25 to 34. There are 43.9 million aged 15-24. These individuals still believe in the American Dream, even if the face of that dream has shifted over the past five years.
Taking the long view can make you rich
As every savvy investor knows, Warren Buffett didn't make billions by betting on half-baked stocks. He isolated his best few ideas, bet big, and rode them to riches, hardly ever selling. You deserve the same. That's why our CEO, legendary investor Tom Gardner, has permitted us to reveal The Motley Fool's 3 Stocks to Own Forever. These picks are free today! Just click here now to uncover the three companies we love.