Mar022017

Millennial’s first home will likely be high-density condo

A cap on loans and increased builder costs forces builders to increase density to meet the burgeoning demand of Millennial buyers.

Millennials find very little available for sale on the MLS in their price range because the previous generation, Generation X, is still trapped in their starter homes, lacking the equity to make a move-up trade. Nearly 6 million people remain trapped in their entry-level homes they purchased a decade ago. Perhaps they enjoy their gilded cage, but since they may not leave without severe financial consequences, their homes resemble a debtor’s prison.

People also remain in their homes longer because even with the newfound equity from reflating the old housing bubble, without increases in pay, they face limitations on borrowing enough to complete a move up. While their house increased in value, the move-up house they desire also increased in value, and unless they earn more money to borrow enough to make a trade, they gain little by moving. Since the last decade witnessed anemic wage growth, fewer people can borrow enough to move up.

Millennials turn to homebuilders

If Millennials can’t find resale properties on the MLS, they must turn to homebuilders to provide entry-level product. Over the last 10 years, homebuilders provided product almost exclusively to the move-up market because they were the only buyers with good credit, stable jobs, and sufficient equity to close the deal. Homebuilders also avoided the entry-level market because the costs and fees associated with new home construction, particularly in California, is so high that homebuilders can’t profitably build and sell homes at those price points.

The demand from Millennials is real, but due to their lower incomes (they’re still early in their careers), the demand is concentrated at lower price points in the entry-level market — a market homebuilders shunned over the last 10 years.

Now that the market enjoys robust demand, homebuilders must find a way to satisfy that demand in an environment marred by higher costs and fees. The only viable solution is to increase density — significantly.

The Millennial generation, unlike previous generations, will largely be forced to buy smaller houses or high-density condos to become homeowners.

Over the last few years, a new trend toward higher density emerged all over California. In Coastal areas, these high-density projects tend to be apartments, but these may be converted to condos after 10 years when the original developer can no longer be sued for construction defects. In the Inland Empire of Riverside and San Bernardino Counties, small-lot projects and attached projects appeared in markets where they’ve never appeared before.

Traditionally, condos in outlying markets are the last to recover as people prefer single-family detached homes. However, in this recovery, condos appeared much sooner and in areas where they often failed in the past. This is entirely due to the oversized impact of FHA financing.

In past real estate cycles, we would have already seen a proliferation of interest-only loans, teaser rates, and piggy-back loans to provide (temporary) ownership of single-family detached houses. With those products banned, potential homebuyers must use FHA financing and conventional mortgages to buy a house. This puts a lid on home prices. In order to get costs under this cap, builders must increase density; thus condos proliferated earlier in the cycle, and they will dominate the next expansion.

For millennials ready to buy a home, the pickings are slim

By Kathy Orton, February 23, 2017

For years, millennials looked at owning a home as a distant fantasy. Student debt and a weak job market seemed to conspire to keep this generation stuck in their parents’ basements, if not permanently locked out of the housing market.

But as millennials find better-paying jobs, start families and begin searching for their first homes, they’re encountering an unfortunate reality: Just as they’re finally ready to buy, the housing market has the fewest homes available for sale on record. And those that are for sale are increasingly priced at values inaccessible to first-time buyers. …

Keona and Cameron Morrison, both 31 and with a combined income of $150,000, have been looking to buy in Los Angeles for two years.

“There’s stuff that comes [on the market]; literally, a couple days later, it’s pending,” Keona said. “It’s crazy.”

Teree Warren, a 31-year-old forensic scientist who grew up in Prince George’s County, isn’t faring much better in the Dallas-Fort Worth area.

“The houses go so quickly,” she said.

In a low-inventory environment, anything well priced will move quickly. Despite the false impression created by articles like this one (and realtor bullshit), if a property is overpriced, it does not move quickly.

Overall millennials are falling behind other generations in homeownership, with first-time home buyers, who usually consist of 40 percent of the market, stuck at 34 percent.

That could become damaging to this generation’s future prosperity. …

“Owning a home for a longer period of time creates more wealth,” said Christopher E. Herbert, managing director of the Harvard Joint Center for Housing Studies. “If you shrink that amount of time, you’re going to shrink how much wealth it creates.”

This is a guy who obviously wasn’t paying attention to the housing market over the last 15 years. Many, if not most, buyers from 2006 have no equity. Buying a house was the largest wealth destroying decision of their entire lives. And even many who bought early made an equally foolish financial decision when they tapped this wealth for consumer spending.

For Keona Morrison, the challenge of finding a home feels deeply personal.

“I feel like if there were more African Americans owning homes, we could set our children up for greater success,” she said. “It’s all about having that leverage. . . . I guess what homeownership means to me is just having your own place, having something you can fall back on.”

That comment is a twofer. First, she mistakes debt for wealth, and second, she mistakes squatting for security. She isn’t the first to make these mistakes.

Improvement since recession

For years after the recession, most millennials couldn’t afford to even consider entering the housing market. Many were saddled with student debt, and the labor market wasn’t friendly even to young college grads, contributing to the stereotypical image of the barista with a bachelor’s degree.

But as the economy has improved, so have millennials’ fortunes.

The most recent employment data shows that the percentage of 25-to-34-year-olds in the labor force is the largest in eight years. This group has also recently begun to enjoy stark wage gains. Recent census data showed that in 2015, millennials’ incomes jumped 7 percent, far more than most other groups’. Seventy-two percent of millennials rate their personal financial situation as fairly good or very good in 2016, up substantially from three years earlier, according to a recent Harvard Institute of Politics poll.

In a stronger financial position, more millennials are starting families. The census projects that household formation will average about 1.5 million per year through 2020, up from the 900,000 annual average in the past five years. …

The economy was weak for a full eight years after the 2008 collapse, posting only meager growth. This year will likely be the first to show some quarters of at least 3% annual growth since this weak recovery began in 2009. This will be a plus for housing — assuming rising mortgage rates don’t spoil the party.

Entry-level housing, the homes millennials can most afford, has been particularly scarce. … At the same time, the dearth of homes for sale is driving up prices, making homeownership even more difficult for millennials who do find a home to buy.

Factors affecting inventory

Several factors have contributed to the insufficient inventory. The amount of time a homeowner stays in their home has grown from six years to an all-time high of 10 years. Some homeowners aren’t moving because they owe more on their mortgage than their home is worth. Others would like to sell but worry about finding their next home.

Most housing experts primarily blame low inventory on home builders, who scaled way back after the recession. Housing starts have slowly begun to rise, but construction remains well below healthy levels.

Most housing experts are blaming the wrong culprit. Homebuilders responded to the market. It’s lenders and policymakers who conspired to keep resales off the market that created the problems we have today.

“The challenge is really adding inventory at the entry-level space,” said Robert Dietz, chief economist of the National Association of Home Builders. “Can builders do that at a cost that meets buyers’ expectations, given rising land development costs, rising wages and rising land costs?”

I outlined above exactly what homebuilders must do — and have been doing — to solve this problem. High density is the future. It may not be what people want, but it’s the only product that will be available in the entry-level price range — at least anywhere people want to live…