Homebuilder Sentiment Falls for Ninth Consecutive Month

U.S. homebuilder confidence in the housing market dropped to its lowest level since the beginning of the COVID-19 pandemic. Experts believe the high inflation rate and rising borrowing costs are contributing to first-time homebuyers’ hesitancy to purchase new single-family homes.

The National Association of Home Builders/ Wells Fargo Housing Market Index, which measures the activity of the single-family housing market, fell to 46 in September after declining for the ninth consecutive month. The last nine months are the most prolonged and persistent decline in builder sentiment in the last four decades.

Embed from Getty Images

Experts say a Housing Market Index above 50 shows a healthy market with net positive growth. In November 2020, the index rose to 76, the highest in 35 years, due to the Federal Reserve pushing the federal funds rate to nearly zero. After the pandemic’s dampening effect, the Fed’s loosening of the federal funds rate was meant to stimulate the economy back to health.

Recently The Federal Reserve has been raising interest rates by adopting an aggressive monetary policy to bring the inflation rate back down to sustainable levels. A lack of supply due to construction costs fueled by those interest rates has slowed down building into a housing recession.

NAHB chairman Jerry Konter said builders are responding to a falling market by using incentives to bolster sales, “including mortgage rate buydowns, free amenities and price reductions.”

Pantheon Macroeconomics analyst Ian Shepherdson believes that builder sentiment will continue to decline.

 “This probably will not mark the bottom of the cycle, given the latest surge in mortgage rates above 6%. The rate of fall of mortgage applications slowed over the summer, but the early September numbers point to a renewed sharp decline.”

Mortgage rates have skyrocketed to those seen during the 2008 housing crisis, with interest rates on 30-year fixed loans hitting 6%. According to data released from the Mortgage Bankers Association, mortgage rates have already risen 4% so far this year.

Embed from Getty Images

This increase in mortgage rates would add $389,000 in interest payments to the life of a $500,000 single-family home purchase. The association’s data also showed that the seasonally adjusted MBA Purchase Index rose only 0.2%. New applications for mortgages went down  1.2%.

Though builder sentiment often signals the eventual direction of mortgage applications, NAHB CEO Jerry Howard told Fox Business that people should have confidence that the housing market will pick back up again.

I think you’re seeing a weakening in virtually every market, but those that were stronger are weakening less. I guess the most important thing that investors and people need to remember is that Americans still want to own their homes and that, as soon as the conditions turn a little more favorable, housing will pick up. That will pick up the whole economy.”

Rent Apartment

Why “Lifestyle Renting” is the Latest Trend in The Property Market

In a country where owning your own home has always been seen as something of a status symbol it is a change to the norm that many residents are now preferring the option to “lifestyle rent” rather than invest in their own bricks and mortar.

The recent trend of renting as a choice has grown throughout the 2010s and it seems that it is destined to continue to grow throughout the 2020s, with many Americans choosing to rent closer to their work, saving themselves quality time that they would otherwise be spending commuting from their affordable house further out of town.

Research analyst for RENTCafe Michaela Buzec believes that lifestyle renting “offers flexibility and freedom to move around and change neighborhoods or cities. It’s also a matter of affordability, since home prices in big, desirable cities increased significantly. This trend is scattered throughout the country, but it’s most evident in the expensive markets.”

America currently has a housing affordability issue with house prices increasing quicker than income in the majority of the US market so there are also those who could not afford to purchase their own home even if they chose to.

Embed from Getty Images

But it is not just those that are fresh out of college that are opting for renting. Many empty nesters are downsizing and heading to areas that they may not necessarily have been able to afford. There is also the understanding that if you move to an area that you do not like, it is far easier to move from rented accommodation than having to sell your home. It is also a fantastic way to get around some of the high house prices that have appeared over the last decade.

Research also shows that many families are getting swallowed up by debt once they own their own home, with mortgage repayments just the beginning of the costs that owning your own home brings. So although many rental properties have one significantly higher bill – many lease agreements cost more than the average mortgage repayment – many of the other bills such as commuting, repairs and maintenance are either reduced or removed completely. Landlords have a duty of care to provide a home for their tenants that is safe and secure and any issues you have should be taken care of as part of your rental agreement, meaning the money home owners are putting aside each month can be put towards the rent instead.

Another great savings is the amount of money renters would not have to pay in property taxes which vary between states. And although many landlords request a security deposit, this is small compared to the down payment that is required when purchasing your own home, with many mortgage providers requesting around 20% of the property’s price.

Renting in the 2010s saw a huge increase in the percentage of renters with 74 percent more renters in 2019 than there were in the 1960s. Currently over 100 million Americans are living in rental properties thanks to the number of renters increasing far quicker than those purchasing their own homes.

Embed from Getty Images

And it is not just financially that renting can benefit you but it can help you in a health capacity too. By moving closer to work it is more convenient to walk, or even cycle, not just to work but also to any entertainment or retail locations you may want to visit. This also reduces the costs of the wear and tear on your vehicle as well as the money you would have spent on gas and parking.

A recent study of why people chose to rent in the last ten years saw that the reasons were varied, with some stating their financial requirements – such as high student loans as well as the increase in the housing market prices. However others felt the need to rent due to the ever-changing job market with long-term job security no longer an option for many American workers.

Although in the past it was easier to have job security, many employees find they have to move regularly for work meaning owning their property is not always the best option. This is clearly evident in cities where there used to be a homeowner majority such as Memphis, Tennessee; Detroit, Michigan or Stockton in California, who have all seen their renter majority increase over the past decade although Springfield in Missouri is one of the top ten cheapest cities to rent.

As Buzec confirms:

“Perhaps the most surprising aspect is to see cohorts traditionally oriented towards homeownership give up this status and willingly start renting. These include seniors and high-earning Americans, who see renting as the better option for their situations. This fact supports the most prominent trend of the decade, that of renting as a choice, more than simply a solution.”

Millennials Buying Home

Why Millennials Are Buying Fewer Homes

Millennials are currently the largest group of consumers in the US, and as such have a significant impact on businesses and the economy, an impact which is sure to grow stronger with time. As such, millennials are the frequent subject of speculation about their lifestyles and spending habits, and much has been made online of their supposed “killing” of various industries. Various stereotypes of millennials abound; they are thought of as having short attention spans and problems committing to jobs, but are also recognized for their desire to feel a sense of purpose and community in their professional lives. Whether or not millennials differ fundamentally from other generations when they were the same age remains an open question, but as the spending habits of young people influence various industries, businesses will have to adapt in order to meet the demands of their newest generation of customers.

Embed from Getty Images

One such industry is real estate. For various reasons, millennials seem less likely than their parents’ generation to want to invest in purchasing a home—according to a ValueInsured Modern Homebuyer Survey, only 48% of millennials think that buying a home is a good investment. This is a sharp decline from two years prior, when 77% of the same generation believed in the value of purchasing a home. Many explanations have been proposed for the downward trend in millennials’ view of the value of real estate, but one popular theory is that millennials are a generation that values experiences over products, preferring to spend money on ephemeral things rather than physical objects. This theory has gained significant traction among people who seek to understand changes in young people’s spending habits, particularly when it comes to their reluctance to make expensive, permanent purchases like real estate.

When millennials are asked about their views on homeownership, however, the answers they give tend to refute this belief.

However, other theories have been proposed that have less to do with the unique characteristics of the millennial generation and more to do with external pressures. The previously mentioned survey offers different explanations for millennials’ reluctance to invest in homeownership. For instance, 49% of first-time homebuyers are concerned that rising mortgage rates could cause homes that are affordable now to become unaffordable in the future. Other economic anxieties factor into this reluctance to buy houses; 67% of first-time buyers worry that they will be unable to save enough money to buy a house they actually want to live in, and 52% believe that a home they buy now is likely to drop in value within a year. Additionally, 68% worry about the threat of another housing crisis, and 64% worry that they’ll suffer from buyer’s remorse after purchasing a home.

Embed from Getty Images

Despite the reality of these widespread economic anxieties, however, many believe that millennials simply choose not to buy houses because they prioritize investing in experiences. When millennials are asked about their views on homeownership, however, the answers they give tend to refute this belief. One of the factors that delays homeownership for the millennial generation is the burden of financial obligations like student debt, which has exploded in recent years, and the slow rate of wage growth over the past several years. However, research has shown that when these financial burdens are lifted, such as when a person finishes paying off their student loans or gets a higher-paying job, rates of homeownership among millennials increase dramatically. That being said, even when the financial burdens faced by millennials are taken out of the equation, many millennials still can’t afford to buy a house. This is because the price of housing has also increased. And while a handful of millennials have taken to a “digital nomad” lifestyle, living in a mobile home and working remotely, this trend appeals to only a small number of people, as such a lifestyle can become immensely difficult both for social and practical reasons. In fact, this trend is likely driven not by millennials’ unique interest in experiences over things, but rather by financial difficulties, as the lifestyle of a “digital nomad” is one of the more affordable ways to live. Nevertheless, the myth that millennials’ spending habits are driven by preferences for experiences rather than financial difficulties persists, and continues to serve as a justification for blaming this generation for killing any number of industries.

Millennials Buying Home

Millennials Face Difficulties Affording Homes

For many Americans, a key part of the American Dream is the ability to save enough money to afford a home. But for millennials, many of whom are currently at a point in their lives where they’d like to move out of their parents’ house or their apartment and own a piece of real estate, a number of factors can make this dream seem to be an impossibility. According to the Urban Institute, just 37% of millennials owned homes in 2015, down eight percentage points from Gen Xers and Baby Boomers when they were a similar age. If millennials owned homes at the same rate as previous generations, there would be around 3.4 million more homeowners today. And although 9 out of 10 millennial renters would like to purchase a home, only 4.9 percent say they plan to do so in the next year, and 34 percent anticipate waiting five years or more before being able to buy real estate. Among millennials who want to own a home but are unable to do so, 3 out of 4 cite affordability as the reason, with many citing a lack of savings for a down payment and the burden of student loans as contributing factors.

Embed from Getty Images

The causes for millennials’ problems affording homes are multifaceted. Whereas many Baby Boomers were able to attend public colleges and universities without having to pay for tuition, most Millennials did not have the same luxury, instead having to borrow tremendous amounts of money to pay for educational costs which, despite offering a value which has remained stagnant over the past several decades, have grown substantially faster than the rate of inflation. Because a higher percentage of millennials attended university than previous generations, the value of a college degree has diminished, as employers have a wide variety of choices for hiring well-educated candidates. And while millennials’ paychecks have roughly the same purchasing power as those of Americans living 40 years ago, the average cost of housing has more than doubled in that time. It has been estimated that, at the current rate, it will take the majority of millennials twenty years to save enough money for a down payment.

The financial burdens imposed on millennials dreaming of owning a home extend beyond stagnant wages and student loan debt. The cost of renting an apartment is substantially greater than it used to be, and because of the generation’s difficulty earning money, financial institutions are more reluctant to grant credit to millennials, with 58 percent of millennials being denied credit, compared to 35 percent of prior generations. Millennials are also less likely to own stocks than other generations were, as a result of having come of age during the Great Recession and becoming skeptical of the stock market as a result, causing many millennials to miss out on some of the major benefits of the recent economic boom. As a result of these economic problems, some forecasters predict that real estate agents will have difficulty selling houses in the future, as millennials replace Baby Boomers as the country’s largest generation.

Embed from Getty Images

Other factors discouraging millennials from homeownership are also at play. Millennials are the most racially diverse of any current American generation, and homeownership is more valued culturally among caucasians. Additionally, millennials are waiting longer than their parents and grandparents to get married and have children, as the marriage rate among young people has dropped from 52 percent in 1990 to 39 percent in 2015, delaying the urgency of owning a home. Also, millennials tend to prefer to live in cities more so than prior generations, where the cost of living is higher and purchasing a house is out of the question. As a result of economic changes over the past several decades, the demographic among millennials most likely to own a home are those who can earn more due to having a college education and come from a wealthy background, as they can borrow money from their parents to supplement the cost of a down payment. As houses are frequently the most valuable financial assets Americans own, not owning a house has a negative impact in a person’s overall ability to accumulate wealth over time. Additionally, intergenerational transfer of homes is likely to increase wealth disparity between races of millennials, as minorities are less likely to own and be able to inherit homes.

Though these prospects seem grim, a number of solutions have been proposed to help with the problem of home affordability among the younger generation. One proposed solution is to invest in programs teaching young people about the finances of homeownership, encouraging people to start saving up for a home from a younger age and increasing awareness of programs designed to help people afford homes. Another proposal is to update the criteria that creditors use to evaluate millennials’ suitability for loans, taking into account their rental, telecom, and utility payments. In any case, whether you’re interested in buying a home soon or not, it’s always a good idea to make sure you’re keeping good track of your finances and have a smart, realistic plan for your future.