As Europe waits to see what follows the Cypress haircut and Italian political deadlock; Japan waits to see if its efforts at halting deflation produce progress, ignite excess inflation, or fail; China waits to see if it can sustain growth while coping with raging inequality and corruption; and the rest of the world waits for growth, it is nice to see such optimism about markets and America. Tight oil and fracked gas, a return of manufacturing, the housing market nearly back to normal — all good, right?
Perhaps I remain the only skeptic left on the housing market. To me, much of the recovery was spurred by investors snapping up single-family houses at depressed rates in order to rent them out. That is fine, but it makes housing a speculative asset market, rather than a market driven by a steady expansion of basic demand from new household formation.
Speculative asset markets peter out or crash. Steady demand-driven markets underwrite long-term real growth. So there is a real question whether the housing market revival portens the former or the latter.
Here is what the demography and economics suggest. The size of the first-time home-buyer cohort (25-40) will grow by just under 1% per year for the next ten years; that is not bad. But two other factors come into play. First, people buy new homes when they are expecting their first or additional children. The fertility rate in the US has fallen to an all-time low, and the number of births is declining. Even more important, the ability of young people to buy homes is being hit both by heavy burdens of student debt (so that student loan payments compete with mortgage payments for available income) and stagnant wages. In fact the percent of people 20 and older living with their parents has doubled in the last 20 yrs, from 1 in 10 to 1 in 5.
So expect the new home market will level off soon — barring a big upswing in incomes or birth rates, neither of which I see as likely.