Is pent-up housing demand real or a realtor fantasy?
Some normal housing demand was delayed to the recession, but no great influx of demand is likely forthcoming.
Pent-up demand is the idea that many, many more people would participate in a financial market if some temporary barrier were removed, a barrier currently preventing them from participating today. Since polling data shows a very high percentage of people want to own a house but only about 60% actually do, theoretically, there is always pent-up demand waiting to be unleashed.
The primary barriers preventing more people from buying homes are down payments, qualification standards, and verifiable income. All three of these barriers were eliminated during the housing bubble by 100% financing, fog-a-mirror qualification standards, and liar loans. As a result, homeownership rates rose from 64% to about 70% as pent-up demand was brought to market.
It didn’t work out too well.
As it turns out, down payments, qualification standards, and verifiable income are not temporary barriers to be casually brushed aside, but fundamental pillars of stable underwriting — a permanent barrier that prevents many with the desire for home ownership from ever creating measurable demand.
This isn’t a bug in the system. These fundamental barriers preserve the integrity of the housing market by preventing unsuitable prospective homeowners from undertaking a task for which they lack the proper financial management skills. Perhaps through proper education, we can increase the number of those people with the basic skill set, but simply dubbing them homeowners doesn’t do the trick.
Today’s weak demand
The homebuilding industry is greatly concerned by the low first-time homebuyer participation rates among the Millennial generation. The normal first-time homebuyer participation rate is about 40%; however, the current rate is only 32%, which is about 20% below normal [(40-32) / 40 = 20%]. The first-time homebuyer participation rate needs to increase by 25% to get back to normal [(40-32) / 32 = 25%].
First-time homebuyer participation is so low because the Millennial generation came of age during the Great Recession. Many couldn’t find good jobs, and even when they did find a job, most chose to rent because they didn’t have the down payment, and they have copious amounts of student loan debt. Perhaps they will contribute some single-family home demand in the form of rental housing, but it may be many years before they are in a position to buy.
Eventually, this age group will be in a position to buy a house, but it will be much, much later than the generation that had access to no-money down mortgages and liar loans. For those that believe this pent-up housing demand will propel house prices ever higher, this demand may remain pent up for a very long time.
By Brad Hunter, January 29, 2016
One of the most perplexing aspects of the new housing market is the outlook for entry-level new home demand. … There is general agreement that there are millions of “pent-up households,” because so many Millennials are living with their parents, and delaying getting married and starting their own families. The question is whether it is a “delay,” or a “cancellation.” I believe the answer is: both.
The question I asked at the beginning of this post is whether or not pent-up demand is real or a realtor fantasy. I also believe the answer is: both. Some additional demand is bound to surface over the next decade or more, but it will continually disappoint the bullish forecasts of those who want it to be better.
There are Gen Y’ers who will get married, but in their 30s instead of in their 20s, some of whom have deferred having children, and others of whom will choose never to have children. My analysis suggests that the “deferrals” will outnumber the “cancellations,” and that the implication is that the pent-up demand is real, and will emerge gradually over the next several years. We are already starting to see marriage rates rising (slightly) and births are rising as well. …
And what is his analysis based on?
Surprisingly, it appears that BOOMERS have accounted for most of the increase, partly due to a rebound from unusually low divorce rates (unhappy couples stayed together longer for economic reasons when the economy was weak) …
Combine the misery of a deep economic recession and multiply that by an unhappy marriage, and you get some really miserable people.
One more factor: attitudes among twenty-somethings regarding home ownership versus rental living are vastly different than they were in previous generations. The question in this instance is: is this changing now that more Millennials are getting married, and/or, will it change in the future? …
An astonishing number of the 18-31 year age cohorts are living with their parents. This large group of young adults are not currently forming new households and stimulating housing demand. When they finally move out — if they ever move out — they will demand either rental housing or an ownership stake. Which way they go will have an impact on future house prices. (See: Millennials: pent-up housing demand or lost generation?)
The re-entry of the entry-level buyer has begun, but this group’s next moves will be gradual. …
As we watch this trend unfold, we should bear one thing in mind: entry-level no longer equates to “first-time.” First-time home buyers generally lack the income or the savings needed to buy a new home. … Once they have bought a starter home and traded up out of that one into a larger (used) home, many of them will have developed sufficient equity to buy one of the lower-priced new homes.
Homebuilders are completely abandoning the entry-level market. Personally, I think this is a mistake on their part. The entry level is generally the segment of the market with the greatest demand. Unfortunately, with the reflation of the housing market and the problems with Millennial’s finances, it’s not today. If this does change, and if Millennnials really do buy houses in large numbers, builders will miss an opportunity to serve them and sell a great many homes.