National U.S. home prices have increased by over 27% from the bottom in early 2012, helping to improve consumer balance sheets and drive a strong recovery in a variety of housing-related assets. Going forward, we believe that analyzing the potential demand from young adults is critical to understanding the potential further upside in the residential sector. Importantly, this upside may come not in the form of more modest home price appreciation, but greater velocity in the contribution of housing to GDP.
Lack of participation in home purchases, high levels of student loan debt and weak wage growth have led many observers to predict less demand from the “millennial” generation. However, the opposite view is also quite interesting: These young adults have lived with their parents or rented with roommates for longer than previous generations, and through continued economic growth and eventual wage growth, these individuals could present significant pent-up demand for housing.
In our view, it comes down to one key chart that must be monitored: The annual change in households. Three observations:
- The growth in households since the financial crisis has been almost entirely from renters, many of whom have focused on multifamily apartments.
- While a step in the right direction, each multifamily housing start creates one job for every three jobs created by a single family housing start.
- Even those who chose to rent a single family house have much less of an impact on the economy than a purchaser who also occupies a home, as homeowners invest far more in their homes than renters, through both furniture expenditures and renovations.
While timing may be difficult to predict, stronger growth, lower unemployment and gradual wage growth all bode well for growth in owner households. While our base case is for national home prices to rise by 3% per year over the next two years, pent-up demand and strong household formations could result in even greater strength from the housing sector.