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Spring winds are often accompanied by an increase in housing activity. How are the housing winds blowing at the moment?
The American housing sector is experiencing both headwinds and tailwinds. Housing growth is regarded as an essential contributor to economic growth because of the complimentary spending associated with home buying. Simply defined, complimentary spending refers to the additional dollars spent as a result of an initial investment. Home purchases often generate additional spending across 40 business channels including furniture, appliances and landscaping. While new home construction generates the most ancillary spending, a boost in sales of existing homes also bodes well for the economy.
Headwinds against housing growth stem from two areas. The first challenge may actually help in the short-term. Since the Federal Reserve has indicated its plans to raise interest rates, many families are trying to lock in historically low rates by refinancing their current mortgages or moving up to a bigger/nicer home. The urge to buy or refinance at today’s lower rates calls into question whether housing starts can sustain long term economic growth.
The second headwind is generational in nature. Baby Boomers are no longer America’s largest demographic group, but the mass of Boomers born between 1957 and 1961 remains the largest population born in the fewest number of years. This group is now between 55 and 59 years old, which is significant when you consider that consumer behaviors change with age. The 55 to 59 group may be looking toward retirement, purchasing a vacation home or downsizing. We have had very few clients build a house in their late 50’s and demographics analyst Harry Dent Jr. pointed out that the average American buys their largest home between ages 44 to 47.
Moving on to housing tailwinds, an important segment propelling housing growth is the Millennial generation. Currently 18 to 34 years old, Millennials make up the largest part of the American workforce. That is good news. Additionally, a larger percentage of 30-somethings still live with their parents. Arguably, as the economy improves and the natural movement toward family formation continues, albeit later in life, more Millennials will move into the housing arena. They may purchase a multi-family home or even choose to rent. Regardless of how they approach home buying, the natural progression toward family development could boost the housing market and thus the American economy.
Understanding where real economic growth comes from can be confusing and frustrating for economists, let alone the average investor. Grasping the numbers and the direction of growth is further muddied by the ebbs and flows of consumer behavior. Economists view the world as a number of people and assume that they will collectively behave in a certain spending fashion.
But people’s behaviors aren’t necessarily rational. In our opinion that’s why the Federal Reserve’s quantitative easing (QE) programs following the Great Recession failed to stimulate consumer spending. Interest rates may be low, but 55 to 59 year olds are more interested in their individual lives and lifestyles than spending or borrowing at low interest rates.
Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer.[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column offset=”vc_hidden-lg vc_hidden-md vc_hidden-sm”][vc_widget_sidebar sidebar_id=”sidebar-main”][/vc_column][/vc_row]