Unemployment is 5.5%.
Millennial underemployment is around 40%.
The Federal Reserve Bank of Cleveland puts the chances of a 2016 recession at just 6%.
US oil and gas has lost 70,000 jobs since Oct 2014.
Today’s economy has an identity crisis. It doesn’t know if it’s a bull or a bear. Housing is following suit, with positives and negatives locked in a tight bout, though the positives seem to be winning.
Home sales at the end of 2015 were between 5.4 and 5.5 million. These aren’t close to the foreboding numbers seen from 2004-2007, and instead reflect the pre-bubble years. “We’re not seeing the flow of new delinquencies,” says Jane Fraser, CEO of US Consumer Banking. If we’ve learned anything over the last 10 years, it’s what a bubble looks like, and we’re not in one. This is one reason why the Federal Reserve Bank of Cleveland has the probability of recession at 6%.
Even the bad comes with promise. For example, as Millennials procrastinate on home ownership (setting up years of future growth), housing has stayed strong.
The Federal Reserve reports that home equity in the U.S. has doubled to $12.1 trillion since the housing price low in 2011.
Yet according to Moody’s Analytics, every $1 increase in home equity in the fourth quarter of 2014 resulted in two cents of extra consumer spending over the next year-and-a-half – one third what it was before the housing crisis. Consumers may not know which direction the economy is going, but numbers show that they don’t feel good about it, and who can blame them? A trip around the world reveals a volatile global economy with countless tentacles, some which could reign blows on the US economy in the minds of the public. But what are these threats, and are they really a threat to housing?
A decade ago, a drop in oil prices meant everyone had a little extra cash in their pockets.
US oil production has grown 80% from 2008-2015. Thousands of high wage jobs are now invested in the industry. The American move on oil has been so swift and massive that it has provoked Saudi Arabia to intentionally overproduce oil, driving its price down 70% since 2014 at the expense of fellow OPEC economies such as Russia and Venezuela.
Lower oil prices have stymied US energy. US oil and gas has lost 70,000 jobs since the Saudis began overproducing, and that has hurt housing from North Dakota to Texas. In Williston, ND – where just two years ago workers were living in camps because builders couldn’t keep up with demand – there is now a 65% occupancy rate. Louisiana, Wyoming, California and Texas have taken hits as well, although states with more diversified economies are coping well.
Speaking of diversification, the root of Saudi economic warfare is the fact that Saudi Arabia is NOT a diversified economy. 80% of the economy is oil based, and 90% of the workforce is employed by the government. If they were to step down production and let the US gain market share, the lost revenue would put aspects of Saudi life such as free healthcare, free education, no taxes (that’s not a typo), high government wages, and therefore national stability, in peril. For the US, oil is a nice boost to select regions, and its collapse actually benefits states like Michigan where the auto industry is centered. For Saudi Arabia (economically speaking) it’s as if the whole country is Williston, North Dakota. The Russians are pressuring the Saudis to curb oil production, but expect prices to stay low for some time, to the joy of some housing markets, and to the chagrin of others.
Besides oil, the major issue with stocks is China. The world’s second largest economy is slowing down, and commodity prices have been slashed as a result. Economists aren’t sure if a Chinese bubble is about to burst, or if China is simply coming down to sustainable growth levels (no developed country can expect 14% growth year after year). Either way, history shows that when stocks become volatile, real estate investment picks up because it’s less risky.
The downside to a troubled stock market is that it psychologically impacts the public. If people think dark times are ahead, they aren’t making a major purchase. They’re holding onto their money.
Stocks are allowing housing to keep chugging along, while at the same time preventing the industry from boom times.
Millennial Cultural Shifts:
The Millennial home ownership rate of 35% (63.8% nationally) represents an ocean of opportunity. While the grumblings are plentiful – Millennials aren’t committed enough to own a home. They prefer a downtown apartment to a single family home – every indication says that Millennials are procrastinating on, not rejecting home ownership.
For example, Millennials are getting married later than any previous generation. As life expectancy and retirement ages grow, so does the age people get married. Married couples have a 30% higher home ownership rate than singles.
The other major issue is wages. To Baby Boomers and Millennials, sub 6% unemployment means two very different things. That’s because unemployment numbers don’t factor in underemployment. According to the Federal Reserve Bank of New York, 44% of college graduates in their 20s are still stuck in low wage jobs. This shouldn’t last much longer. The retirement of Baby Boomers is opening up more jobs to Millennials, and they are now the largest segment of the US labor force.
The Millennial problem is not a problem, but the opportunity of a lifetime. The housing market faces several formidable threats. None are insurmountable. Energy jobs are evaporating, the stock market is in chaos, and Millennials aren’t buying homes, yet housing is still fine. While this is cause for weariness among consumers, those in the industry should be optimistic. Times right now aren’t bad. Soon, they may get a whole lot better.