The future of housing is positive because of several fundamental reasons. While the US economy is officially in a recession, this recession is very different.
This Recession is Different
How do you define a recession? When you have 2 consecutive quarters of negative economic growth you’re in a recession. This one, however, is different.
Begin with the fact that it’s man made. There was no structural economic reason for this; it was a reaction to Covid 19. The best economy ever was shut down. This never happened before.
During the Great Recession unemployment went from 5% to 10%. In a matter of weeks we went from 3.6% to 13%. TARP cost $475 million in the Great Recession. So far this year stimulus packages are at $2 trillion.
While unemployment is improving, it won’t be 3.6% again this year. Additionally, we don’t know how much more the economy will need.
Interest Rates Will Stay Low
Today the Fed will issue a report as it closes it’s 2 day meeting. Don’t expect much to change. We’ve just had our biggest drop in inflation since 1947 according to CPI data. Bond yields remain anemic and the Fed is at zero. I bet it stays there.
Mortgage rates are correspondingly low and forecasts are for this to continue throughout next year. CNBC’s Steve Liesman as well as guests on Squawk Box this morning all say that rates will remain low until 2022.
You don’t have to be an economist to know that low mortgage rates are a stimulus for housing. Every 1% drop in rates = 9% more buying power (a $600,000 buyer becomes a $654,000 buyer). We are more than 1% lower than in January.
The Inventory Crisis is Real
The inventory crisis is real. The New Jersey MLS just crossed the 2,000 mark with 2,034 homes for sale. This is half of what you’d expect at this time of year. I believe there are 2 reasons for this:
- Baby Boomers
- Covid 19
Baby boomers are not moving out of their homes as quickly as generations before them. People in their 70’s and 80’s without a major illness happily stay in their homes. Their mortgages are paid off and with the high cost of rentals, it’s usually cheaper to stay put. Since Boomers are 2nd only to Milennials in size, this has a major impact on available inventory.
Covid 19 panic caused many sellers to withdraw their homes from the market. People have calmed down since mid March and houses are coming back on the market. However there’s still a good number waiting for next spring.
This is Why The Future of Housing is Positive
Covid 19 only made worse an ongoing inventory crisis fueled by Boomers staying in their homes longer. When Covid 19 concerns no longer exist, we’ll still have low inventory.
Consider the facts. Milennials are the biggest demographic and they are 24-39 years old. As they start families, they naturally move out of their city apartments to Bergen County and other suburbs where they have space, a yard and good public schools. Boomers, the 2nd biggest demographic at 56-76, are not quick to move.
What do you have? Increasing numbers of buyers (Milennials) with decreasing numbers of sellers (Boomers). This will last for the next 15 years at least.
Not fun for buyers but great for sellers. Even when mortgage rates go up in the future, there will still be more buyers than available homes. This is why the future of housing is positive. This is no bubble. This is reality.
This is a really good read Barb! Very insightful!