BOULDER – In the first article of this series, we talked about some of the financial trends that we have seen in recent years and how they have affected the real estate industry. This was the topic of Dr. Elliot Eisenberg’s presentation at Inman Real Estate Connect NYC, and I couldn’t wait to bring it home to you. It’s so interesting how one seemingly small economic shift can have such a far-reaching impact on other areas of our lives. As I mentioned in that article, our real estate market conditions are a very reliable indicator of the over-arching economic climate in the United States. When home sales volume and prices are up, you can bet that every other aspect of the American economy is thriving, as well.
Interestingly, the relationship between our lifestyles and the economy is somewhat bidirectional in nature. In other words, we enjoy certain styles of living as a result of how well our economy is performing. Meanwhile, the lifestyle choices that we make play a significant role in shaping the financial health of our nation. Let’s take a look at how all of this influences the housing market.
Lifestyle: Household Formation and the Generation Gap
Although household formation is a term that you don’t hear often in the financial press, it’s a concept that you should become acquainted with. For anyone who intends to buy or sell a home in their lifetime, understanding how household formation affects inventory and pricing is critical.
When we see a higher household formation rate, it’s great news for real estate (and the economy, in general). It means that more people are getting jobs, changing lifestyles, and ultimately, have more cash to support all of this. Surprisingly, seniors are leading the way for the creation of new households right now. The baby boomers are moving out of the homes where they raised their families and upgrading to higher-end living. They have a new found freedom and the kind of financial security that the younger generations are still working for. This is a serious driver for the luxury housing market, and it will continue to be for the next few years.
Millennials, on the other hand, seem to be reluctant to enter the housing market. Maybe it’s because they saw what happened with previous generations and the overextension of credit. Perhaps they are still enjoying the freedom and portability of the renter’s lifestyle. There is quite a bit of speculation about why this large pool of would-be first-time buyers are holding out on us, but nobody can say for sure. Whatever the cause, they are returning home to their parents in such large numbers that they are now being called the “boomerang generation”.
Even in spite of an entire demographic choosing to rent, rather than buy, we are heading into our fourth straight year of impossibly tight housing inventory. This is the kind of thing that pushes home prices skyward. Scarcity drives demand, leading buyers to offer more and sellers to expect the same. It’s the very definition of market value, and since 2013, we have watched these numbers climb by about 5%. Unfortunately, the principles of supply and demand take a while to affect wages. In the same time period, at a 2% increase, wage growth has been less than half that of price growth.
Both buyers and sellers should be following economic trends in real estate. This data is the determining factor for everything from selling price to how long it takes your home to be sold. There is so much in store for 2016.
To read the first part of the series on Economic trends in real estate, click here.