Housing starts in the U.S. were up 8.8% in 2014. That’s the good news.
The bad news is that the growth rate in 2014 was slower than 2013 and 2012. But that’s OK, because home builders are optimistic that 2015 will be fabulous!
They estimate single-family construction starts will zoom ahead by 25% this year. Not to be outdone, the National Association of Realtors estimates single-family housing starts will grow by 32%.
Those are wonderful projections, but these groups seem to be missing something — clients.
It’s not as if the slow rebound in housing is a puzzle, at least for anyone who’s been looking. It’s not about low interest rates, we’ve had those for some time, and chances are we’ll be in a low interest rate environment for years.
We’ve also had plenty of people who fit the category of first-time home buyers, which would be young adults. What we’ve been missing is the desire on the part of those consumers to buy homes, and no program currently on the table is going to change that.
The exact young adults we expect to buy homes, college-educated professionals, are dealing with two huge issues: limited job prospects and soaring debt. The two work in concert to stymie the natural progression of consumers through their ages and stages of life.
A recent article in the Wall Street Journal sums it up nicely. The article describes a 31-year-old young lady in New York who works for a public radio station and waits tables. She has a master’s degree in acting from Columbia, and $190,000 in debt. She would like to move to New Orleans and buy a home, but is a bit fearful of not finding a job in that market.
In the not-so-distant past, anyone with $190,000 in debt had a house to show for it. Now, it’s a question worth asking: “Did you buy a nice condo with a water view, a modest home in the suburbs, or a piece of paper from a university?”
I’m not knocking student loans or college education. I’ve had my share of both, but at this point the dollars make no sense.
Meanwhile the job market is still very difficult, no matter what the headline unemployment number happens to be. The New York Federal Reserve estimates that 44% of recent college graduates (age 22 to 27) are working in jobs that do not require a college degree.
So while the unemployment rate of recent college graduates might be low, their earnings aren’t necessarily what would be expected after obtaining a four-year degree.
Slow To Get On The Train
Both of these things are conspiring against millennials who want to travel down the well-trodden path of adulthood, which involves marriage, kids, and a whole bunch of spending.
As I’ve mentioned many times, an old boss of mine in Texas, David Smith, had a saying for every occasion. The week of my wedding he told me: “You’re never richer than the day before you get married.” That bit of wisdom has come back to me often over the past 25 years, but I know David was wrong.
As I found out a few years after I wed, you’re never richer than the day before you have children. I can attempt to reason with my wife as to why we need to spend money on golf clubs instead of furniture, but there is no reasoning with kids.
The money just flows out the door. I’m writing this after dropping my youngest, who’s still in high school, at the airport this morning for a school trip to Washington, D.C. The trip lasts for four days and three nights. Just the thought of the overall cost makes me shudder.
Millennials are proving slow to get on the train of having, and spending on, children because they’re slower to get married. And it has nothing to do with generational attitudes.
A recent Harris Poll survey showed that 21% of millennials believe marriage is very important to Americans, and 47% think it is important. These numbers are almost identical to those for Gen X (21% and 48%, respectively).
However, a report from the Urban Institute shows that today’s young adults are on track to have the lowest rates of marriage by age 40 than any previous generation. If the current pace of marriage continues, more than 30% of millennial women will remain unmarried by age 40, nearly twice the share of their Gen X counterparts.
If it’s not their view of marriage that is causing the millennials to eschew nuptials, then it must be something else. I’m pretty sure I can pinpoint the issues slowing down their marriage rate — income and debt.
As noted above for the home builders and realtors, the problem of a falling marriage rate doesn’t affect just the would-be brides and grooms. A lack of family formation creates a domino effect that touches all of us, and greatly alters the course of our economic future.
The good news is that, by and large, people are predictable. While millennials have pushed out marriage a bit, somewhere in the universe a giant biological clock is ticking.
It’s very likely that our young adult population will still marry in the same percentages as Gen X, and will also have children, which will put them on the same path to spending that the rest of us traveled. This will lead not only to increased demand for housing, but also baby furniture, children’s clothing, child care, and all the other things that go along with starting families.
Unfortunately, this good news generally stops at the shores of the U.S., since we have a significant young adult population and most other developed nations do not.
This means that the U.S. should eventually return to years of growth, while countries like Germany, Spain, Italy, and Japan will spend their years trying to balance the needs of an aging population with the reality of a shrinking working population.
In today’s Ahead of the Curve, Charles Sizemore explores the valuation of stocks by using the cyclically-adjusted price/earnings ratio and that we just may be trading at the highest P/E ratios since WWII. Take a look below.