MONEY buying a home

Turns Out Millennials Are Buying Homes. But Another Key Group Isn’t

Contrary to what you may think, twentysomethings are becoming homeowners. It's middle-aged folks that are forgoing it.

The latest Census data shows homeownership is still falling for young adults, and the National Association of Realtors (NAR) reports that the share of first-time home-buyers is slipping. While the housing market is clearly improving, with four of the five key indicators of the housing recovery from our Housing Barometer at least halfway back to normal, it looks like the recovery is happening even without much improvement in first-time homeownership.

Not so fast. The official homeownership rate published by the Census gives a misleading picture of homeownership trends. In fact, homeownership among young adults is both on the rise and not too far off from where demographics say it should be.

The “true” homeownership rate disagrees with the published homeownership rate, and shows that homeownership among young adults increased between 2012 and 2013 after hitting bottom in 2012. Once we adjust for the huge demographic shifts among young adults – far fewer young adults are married or have kids than two or three decades ago – homeownership in 2013 was roughly at late-1990s levels. That means that the demographic shifts among young adults account for the entire decline in homeownership for 18-34 year-olds over the last 20 years. In other words, if the late 1990s can be considered relatively normal, than today’s lower homeownership rate for young adults might be the new normal, thanks to demographic changes.

But that doesn’t mean all’s well. There may be longer-term damage to homeownership from the recession – but to the middle-aged, not millennials. Homeownership among 35-54 year-olds is lower today than before the housing bubble, even after accounting for demographic shifts.

Is Today’s Millennial Homeownership Rate the New Normal?

The demographics of 18-34 year-olds have changed dramatically over the past 30 years, between 1983 and 2013, such as:

  • The percent married fell from 47% to 30%
  • The percent living with their own children fell from 39% to 29%
  • The percent non-Hispanic white fell from 78% to 57%

Each of these demographic shifts is a headwind for homeownership. Young people who are married, have children, or are non-Hispanic white are more likely to own a home than young people who aren’t.

One way to quantify the total effect of these demographic factors on homeownership is to predict what might have happened to homeownership with these demographic shifts if none of the changes in behaviors or circumstances that evolved during the bubble, recession, and recovery took place.

Turns out that although the share of young adults who actually own a home remains considerably lower today (even with the uptick in 2013) than at any time since 1983, it is roughly at late 1990s levels after taking demographic shifts into account. Unless those long-term demographic trends reverse, there might be little room for young-adult homeownership to increase. You’d have to ignore demographic trends that pre-date the bubble to believe that young-adult homeownership will eventually return to its unadjusted pre-bubble levels.

This also implies that there probably hasn’t been a huge shift in millennials’ attitudes toward homeownership, either, since today’s millennials are roughly as likely to own homes as people with similar demographics two decades ago.

Worry Instead About Middle-Aged Homeownership

Here’s the surprise: it’s the middle-aged, not millennials, whose homeownership rate today looks lower than before the bubble. Using the same demographic-baseline analysis, the 2013 homeownership rate for 35-54 year-olds is below the “demographic baseline” (which barely budged over the past 20 years for this age group). Furthermore, homeownership for the middle-aged has not yet begun to turn around as of 2013, unlike for millennials.

Whereas the 2013 homeownership rate for millennials, after adjusting for demographics, is at 1997 levels, the 2013 demographics-adjusted homeownership rate for the middle-aged is at its lowest level in at least two decades (and probably in almost four decades).

And that’s the point: the rise and fall of homeownership during the housing bubble and bust is about people who are middle-aged today. The millennial generation was still in their early 20s or younger in the mid-2000s – too young to have bought during the bubble and then to have suffered a foreclosure: Only the oldest among the 18-34 year-old group in 2013 would have been of home-buying age during the bubble.

Turning more millennials into homeowners, therefore, may not be the missing piece of the housing recovery after all. Long-term demographic changes mean that homeownership among young adults is roughly where it should be. The real missing homeowners are the middle-aged.

To see the full article, including the analysis and charts, click here.

To read more from Jed Kolko of Trulia, click here.

Related:
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MONEY 101 What should I do before I buy a home?

MONEY home prices

Why You Should Worry When Home Prices Fall in Minneapolis

Minneapolis
Minneapolis serves as a bellwether for national home values. Minneapolis Park and Recreation Board, courtesy of Meet Minneapolis

The Twin Cities signal what will happen next year to national home prices better than any other large city—though even it is far from a perfect bellwether.

Wouldn’t it be nice if there were a local housing market that we could use as the nation’s crystal ball? If one market regularly ran ahead of the national trends, we could pay extra attention to what’s happening there in order to know what the rest of the country should expect. During the housing bubble and bust over the last decade, there were clearly markets—like Las Vegas—that had more extreme swings in prices than others did, but being more extreme isn’t the same as being first.

To see which markets, if any, tend to get ahead of the national trend, we looked at home-price changes between 1980 and 2014 in the 100 largest U.S. metros and the U.S. overall, using the Federal Housing Finance Agency (FHFA) home-price index. Our crystal-ball score, calculated for each metro individually, is the correlation between the year-over-year home price change in that metro with the year-over-year home price change for the U.S. overall one year later. In other words, we’re measuring how closely the ups and downs in a local market’s home prices match the national ups and downs one year later. Remember that correlations range from 1 to -1: the higher the correlation, the stronger the forecast. A negative correlation means that a better year for a metro’s home prices is typically followed by a worse year for the nation’s home prices (and vice versa).

The Crystal Ball Award Goes to the Twin Cities
Among the 100 largest metros, the housing market with the highest crystal-ball score is Minneapolis-St. Paul. Other markets that are relatively good bellwethers include San Diego, Ventura County, and Sacramento in California; West Palm Beach and three other Florida metros; Washington, DC; and St. Louis. In general, these markets had a more severe housing bust last decade and faster historical price growth over the past three decades than other markets. But it’s an eclectic bunch, with St. Louis, Washington, and Minneapolis-St. Paul having had a milder bust than the markets in California and Florida.

# U.S. Metro Crystal-ball score: Correlation of local price change with following year’s national price change
1 Minneapolis-St. Paul, MN-WI 0.79
2 San Diego, CA 0.76
3 West Palm Beach, FL 0.76
4 Cape Coral-Fort Myers, FL 0.73
5 Ventura County, CA 0.73
6 Washington, DC-VA-MD-WV 0.72
7 Sacramento, CA 0.72
8 Palm Bay-Melbourne-Titusville, FL 0.71
9 North Port-Bradenton-Sarasota, FL 0.71
10 St. Louis, MO-IL 0.71

This graph shows what a 0.79 correlation actually looks like. Year-over-year home prices in Minneapolis – St. Paul tend to look like national changes but a little bit ahead:

AheadofCurve

What Happens in Texas, Stays in Texas
On the flip side, the markets that are the worst predictors of next year’s home price movements are clustered in and near the Gulf states. The six metros with the lowest correlations are all in Louisiana, Texas, and Oklahoma. The correlation is actually slightly negative for Baton Rouge.

# U.S. Metro Crystal-ball score: Correlation of local price change with following year’s national price change
1 Baton Rouge, LA -0.02
2 Houston, TX 0.02
3 San Antonio, TX 0.03
4 Austin, TX 0.03
5 Tulsa, OK 0.04
6 Oklahoma City, OK 0.05
7 Salt Lake City, UT 0.06
8 El Paso, TX 0.06
9 Greenville, SC 0.14
10 Buffalo, NY 0.22

Looking further at Texas, Dallas and Fort Worth would rank #11 and #13, respectively, on the lowest-correlation list. And if we extended the analysis to smaller metros, the lowest scores would be the next-door metros of Midlandand Odessa, TX, with correlations of -.24 and -.22, respectively. Several other smaller Texas and Louisiana metros also have negative crystal-ball scores.

What’s with Texas? The state was among the least affected by the bubble and bust of the 2000s; its worst period for home prices was in the mid-1980s, even though national home prices were fairly strong. Texas home prices are influenced by the swings in the energy industry, which means real estate in Texas and Gulf Coast tends to beat to a different drummer more than any other market in the country. Here’s how Houston’s price trend compares with the U.S.:

Can “Crystal Ball” Markets Really Tell the Future?

Before anyone starts booking tickets to Minneapolis, San Diego, or West Palm Beach to see what the future holds, here’s the reality check. While some markets are better leading indicators than others, none of them are that great. Our test of “great” is whether any local market’s price change in a given year is a better predictor of next year’s national home price change than this year’s national price change is. That means the number for a local market to beat is the correlation between national home price changes in one year and the next, which is .77. That’s higher than the correlations for 99 of the 100 largest metros — except for Minneapolis-St. Paul, which is just a hair better at .79.

Even though Minneapolis-St. Paul is the best predictor of national price trends for the 1980-2014 period overall, different metros are better predictors of the national trend for narrower time periods. During the recent cycle, from 2000 to 2014, Sacramento, San Diego, and Providence, RI, best predicted national trends; but from 1980 to 2000, three Massachusetts metros — Middlesex County,Worcester, and Boston –showed most clearly what the future had in store. The Twin Cities didn’t do so well in predicting national price trends in the 1980s and 1990s.

The answer, therefore, is that the crystal-ball award isn’t worth much more than the glass it’s made of. In no local market do home price trends consistently and reliably outperform the national price trend in predicting next year’s national price trends. There’s just no shortcut for understanding the U.S. housing market.

See the complete article, with additional charts, here.

Jed Kolko is the chief economist of Trulia.

MONEY Housing Market

Housing Market Recovery Moving Forward, Except for This One Thing

For the first time during the housing recovery, four out of five of Trulia's Housing Barometer measures are at least halfway back to normal. But young adults are still struggling to get jobs.

How We Track This Uneven Recovery
Since February 2012, Trulia’s Housing Barometer has charted how quickly the housing market is moving back to “normal” based on multiple indicators. Because the recovery is uneven, with some housing activities improving faster than others, our Barometer highlights five measures:

  1. Home-price levels relative to fundamentals (Trulia Bubble Watch)
  2. Delinquency + foreclosure rate (Black Knight, formerly LPS)
  3. Existing home sales, excluding distressed sales (National Association of Realtors, NAR)
  4. New construction starts (Census)
  5. The employment rate for 25-34 year-olds, a key age group for household formation and first-time homeownership (Bureau of Labor Statistics, BLS)

The first measure, home prices from our Bubble Watch, is a quarterly report. The other four measures are reported monthly; to reduce volatility, however, we use three-month moving averages for these measures. For each indicator, we compare the latest available data to (1) its worst reading for that indicator during the housing bust and (2) its pre-bubble “normal” level.

4 Out of 5 Measures Improve and Are At Least Halfway Home
All but one of the Housing Barometer’s five indicators have improved since last quarter, and all five have improved or remained steady since last year. Prices and the delinquency + foreclosure rate made the biggest strides:

Housing Indicators: How Far Back to Normal?
Now One quarter ago One year ago
Home price level 79% 68% 44%
Delinquency + foreclosure rate 74% 63% 53%
Existing home sales, excl. distressed 64% 61% 64%
New construction starts 50% 45% 41%
Employment rate, 25-34 year-olds 35% 39% 30%
For each indicator, we compare the latest available data to (1) its worst reading for that indicator during the housing bust and (2) its pre-bubble “normal” level.
  • Home prices continue to climb, though at a slower rate. Trulia’s Bubble Watch shows prices were 3% undervalued in 2014 Q2, compared with 15% at the worst of the housing bust; that means prices are nearly four-fifths (79%) of the way back to their “normal” level of being neither over- nor under-valued. Even better, as prices approach normal, price gains are slowing down and becoming more sustainable: for the first time in almost two years, no local market has had price gains of more than 20% year-over-year.
  • The delinquency + foreclosure rate was 74% back to normal in May, up from 63% one quarter ago. While fewer foreclosures means fewer discounted homes for sale, delinquencies and foreclosures have caused great pain for millions of households and the financial system. For the foreclosure crisis, the light at the end of the tunnel is getting brighter.
  • Existing home sales (excluding distressed) were 64% back to normal in May, up from 61% one quarter earlier. Distressed sales have plummeted as the foreclosure inventory has dried up. Non-distressed sales also stumbled from their peak last summer as higher home prices and mortgage rates reduced affordability, but in the past quarter non-distressed sales have resumed their climb.
  • New construction starts are 50% back to normal, up from 45% one quarter ago and 41% one year ago. Multi-unit starts — mostly apartment buildings — are leading the recovery: in 2014 so far, multi-unit starts accounted for 35% of all new home starts, the highest annual level in 40 years. This apartment boom started last year, and last year’s starts are now being completed, which is increasing the supply of apartments for rent.
  • Employment for young adults, however, took a step back. May’s three-month moving average shows that 75.6% of adults age 25-34 are employed, which is just 35% of the way back to normal. That’s down from 39% one quarter ago, though still an improvement from one year ago. Because young adults need jobs in order to move out of their parents’ homes, form their own households, and eventually become homeowners, the housing recovery depends on Millennials getting jobs.

What’s Missing from the Housing Recovery

First-time homebuyers are still missing from the housing recovery, making up just 27% of existing-home buyers according to NAR’s May report. That’s down a bit both from last month and from last year.

How has the recovery gotten this far without first-time buyers? Investors and other bargain-hunters bought homes near the bottom of the market, in late 2011, which boosted sales and home prices. Now that prices are near long-term norms – just 3% undervalued – the bargain-hunting engine is sputtering. Repeat buyers, who are trading in one home for another, are taking more of the market.

Would-be first-time homebuyers are stuck: rising prices and mortgage rates have reduced affordability before young adults have been able to recover from the jobs recession. A full recovery that includes first-time homebuyers is still years away; many young adults still need to find jobs and keep them long enough to save for a down payment and qualify for a mortgage. Until that happens, the clearest signs of recovery will be apartment construction and renter household formation, not first-time home buying, as young adults move from their parents’ homes into their own rental units.

NOTE: Trulia’s Housing Barometer tracks five measures: existing home sales excluding distressed (NAR), home prices (Trulia Bubble Watch), delinquency + foreclosure rate (Black Knight), new home starts (Census), and the employment rate for 25-34 year-olds (BLS). Also, our estimate of the “normal” share of sales that are distressed is 5%; Black Knight reports that the share was in the 3-5% range during the bubble. For each measure, we compare the latest available data to (1) the worst reading for that indicator during the housing bust and (2) its pre-bubble “normal” level. We use a three-month average to smooth volatility for the four indicators that are reported monthly (all but home prices). The latest published data are May data for the employment rate, existing home sales, new construction starts, and the delinquency + foreclosure rate; and Q2 for home prices.

See the original article, with more charts, here.

Jed Kolko is the chief economist of Trulia.

MONEY Housing Market

The Housing Market Won’t Be Undervalued Much Longer

Trulia's latest analysis shows homes in three-fourths of major U.S. cities are still undervalued, while seven are more than 10% overvalued (most in California). Even there, prices are no where near boom frothiness.

Trulia’s Bubble Watch reveals whether home prices are overvalued or undervalued relative to their fundamental value by comparing prices today with historical prices, incomes, and rents. The more prices are overvalued relative to fundamentals, the closer we are to a housing bubble – and the bigger the risk of a future price crash.

Sharply rising prices aren’t necessarily a sign of a bubble; a bubble is when prices look high relative to fundamentals. Bubble watching is as much an art as it is a science because there’s no definitive measure of fundamental value. To try to put numbers on it, we look at the price-to-income ratio, the price-to-rent ratio, and prices relative to their long-term trends using multiple data sources, including the Trulia Price Monitor as a leading indicator of where home prices are heading. We then combine these various measures of fundamental value rather than relying on a single factor, because no one measure is perfect. Trulia’s first Bubble Watch report, from May 2013, explains our methodology in detail. Here’s what we found.

Home Prices are 3% Undervalued Nationally We estimate that home prices nationally are 3% undervalued in the second quarter of 2014 (2014 Q2), which is far from bubble territory. During last decade’s housing bubble, home prices soared to a level that was 39% overvalued in 2006 Q1, then dropped to being 15% undervalued in 2011 Q4. One quarter ago (2014 Q1), prices looked 5% undervalued, and one year ago (2013 Q2) prices looked 8% undervalued. This chart shows how far current prices are from a bubble:

At this pace, home prices nationally should be in line with long-term fundamentals – i.e., neither over- or undervalued – by the last quarter of 2014 or the first quarter of 2015. The good news for bubblephobes is that price gains are now slowing down while prices still look (slightly) undervalued. We’d be at greater risk of heading toward a bubble if price gains were still accelerating, but they’re not.

Even in the Bubbliest Markets, It’s Not 2006 All Over Again Eight of the 10 most overvalued housing markets are in California, with Orange County, Los Angeles, and Riverside-San Bernardino in the top four. However, they are not seeing the return of last decade’s bubble. These California markets are much less overvalued than they were at the height of the bubble. Orange County, today’s frothiest market, is just 17% overvalued now versus being 71% overvalued in 2006 Q1. Among the most overvalued markets today, only Austin looks more overvalued now (13%) than in 2006 Q1 (8%) – and that’s because Austin (and Texas generally) avoided the worst of last decade’s bubble and bust.

Top 10 Metros Where Home Prices Are Most Overvalued
# U.S. Metro Home prices relative to fundamentals, 2014 Q2 Home prices relative to fundamentals, 2006 Q1 Year-over-year change in asking prices, May 2014
1 Orange County, CA +17% +71% 9.6%
2 Honolulu, HI +15% +41% 5.3%
3 Los Angeles, CA +15% +79% 12.7%
4 Riverside-San Bernardino, CA +13% +92% 18.8%
5 Austin, TX +13% +8% 9.7%
6 San Jose, CA +11% +58% 10.4%
7 Oakland, CA +10% +72% 14.8%
8 Ventura County, CA +9% +73% 12.6%
9 San Diego, CA +7% +69% 11.2%
10 San Francisco, CA +6% +51% 11.6%
Note: positive numbers indicate overvalued prices; negative numbers indicate undervalued, among the 100 largest metros. Click here to see the price valuation for all 100 metros: Excel or PDF.

 

Only in Akron and Cleveland are prices undervalued by more than 20%. Furthermore, in those two markets, home prices are rising below the national average of 8.0%. But in several of the most undervalued markets, including Detroit and Chicago, prices are now rising year-over-year in the double digits. But those markets are unlikely to stay on the most-undervalued list for many more quarters.

Top 10 Metros Where Home Prices Are Most Undervalued
# U.S. Metro Home prices relative to fundamentals, 2014 Q2 Home prices relative to fundamentals, 2006 Q1 Year-over-year change in asking prices, May 2014
1 Akron, OH -21% +18% 4.7%
2 Cleveland, OH -21% +18% 6.3%
3 Detroit, MI -19% +38% 15.2%
4 Dayton, OH -16% +13% 12.1%
5 Worcester, MA -15% +43% 4.4%
6 Memphis, TN-MS-AR -14% +11% 3.2%
7 Toledo, OH -14% +22% 10.0%
8 Chicago, IL -14% +36% 13.5%
9 Lakeland-Winter Haven, FL -14% +54% 3.8%
10 Providence, RI-MA -14% +52% 2.9%
Note: positive numbers indicate overvalued prices; negative numbers indicate undervalued, among the 100 largest metros. Click here to see the price valuation for all 100 metros: Excel or PDF.

 

Three-Fourths of Markets Still Undervalued Of the 100 largest metros, home prices in 76 of them look undervalued. But the number of overvalued markets – 24 – has climbed up from 19 last quarter (2014 Q1) and just 5 last year (2013 Q2). Most of the 24 overvalued markets are overvalued just a bit, with 17 overvalued by less than 10% and 7 overvalued by more than 10%. While the number of overvalued markets is rising, there remains little reason to worry about a new, widespread bubble forming. The last two years of strong price gains have been from a relatively low level and still haven’t pushed home prices nationally above our best guess of their long-term fundamental value.

See the original article with complete charts here.

Jed Kolko is the chief economist of Trulia.

MONEY

Are Baby Boomers Downsizing Into Condos? Not So Fast.

Baby Boomers talk about downsizing but apparently don't do it. Trulia's economist says the long-term trend among older households shows downsizing getting rarer and happening later in life.

Throughout the recession and recovery, Millennials have hogged the attention: they suffered a particularly bad recession, which delayed their launch into the housing market, slowed overall household formation, and lowered first-time homeownership. But they’re hardly the only demographic that matters for housing. Baby Boomers will help determine the demand for different types of housing and the supply of homes for sale when – and if – they downsize.

This morning, Fannie Mae released a note on boomer downsizing, showing that the share of baby boomers in single-family detached homes has been roughly stable from 2006-2012 (rising slightly on a per-capita basis and falling slightly in the most recent years on a per-household basis). The big question is what happens longer term: are we about to hit a wave of baby boomers selling their single-family homes and moving into apartments and condos? It’s unlikely, for two reasons: baby boomers are still years away from the age of downsizing, and the long-term trend shows that older households today are less likely to downsize than older adults in the past.

Let’s start by looking at the age when older households move from single-family homes to multi-unit buildings. Based on the 2013 Current Population Survey’s Annual Social and Economic Supplement (CPS ASEC) – the most recent detailed demographic data available – baby boomers (born between 1946 and 1964, which means 50-68 years old in 2014) are less likely than almost any other age group to live in multi-unit buildings as opposed to single-family homes. The only age group less likely to live in multi-unit buildings is 70-74 year-olds, which is the age group that baby boomers will start to enter in the coming years.

In later years, the share of households in multi-unit buildings rises, but by less than you might guess. Just 25% of households headed by 80-84 year-olds live in multi-unit buildings – which is a lower share than 40-44 year-olds. Even among households headed by adults aged 85 and older, only one-third live in multi-unit buildings – and that’s only counting those who head their own household are not living with adult children or in institutions.

Therefore, as today’s baby boomers age, they’ll grow into age groups first with a lower likelihood of living in multi-unit buildings (70-74 year-olds). Multi-unit living starts rising slightly at age 75-79, and rises more notably only when heads of household reach their 80s.

But will baby boomers, who are in their 50s and 60s today, look like today’s 60- and 70-somethings ten years from now – or will they make different housing decision as they age? One clue is to look at the longer-term trend in multi-unit living among older age groups using CPS ASEC data back to 1979 (no data are available for 1988). The share of households headed by 50-69 year-olds – roughly the age of baby boomers today – living in multi-unit buildings rose to 21.3% in 2012 and 21.6% in 2013, after holding steady in the 19-21% range for decades. Therefore, baby boomers today are a bit more likely than their parents to live in multi-unit buildings instead of single-family homes. It’s too soon to tell whether that increase is a temporary effect of the recession or the beginning of a longer-term trend.

The clearer long-term trend, though, is the decline in multi-unit living at the ages that baby boomers are approaching. The share of age-70-plus households living in multi-unit buildings has been dropping for decades, from over 30% in 1980 to under 25% in recent years. That means that even if the recent uptick in multi-unit living among 50-69 year-olds persists, baby boomers are entering an age group that is less likely to live in multi-unit buildings than their own parents did two or three decades earlier. While the cyclical effect of the recession might hasten downsizing for some boomers, the long-term secular trend means boomers are reaching older adulthood in an era when downsizing is less common and comes later in life than it used to.

Note: the CPS ASEC data were downloaded from IPUMS, which requests to be cited as: Miriam King, Steven Ruggles, J. Trent Alexander, Sarah Flood, Katie Genadek, Matthew B. Schroeder, Brandon Trampe, and Rebecca Vick.Integrated Public Use Microdata Series, Current Population Survey: Version 3.0. [Machine-readable database]. Minneapolis: University of Minnesota, 2010.

See the complete article with charts on Trulia.

Jed Kolko is the chief economist of Trulia.

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