Homeownership Rate 23 Points Lower For Millennials

Homeownership Rate - Relatively Poor MBA Applications

Before getting into the Homeownership Rate, let's review the MBA Appplications. MBA applications index in the week of May 17th increased 2.4% weekly which was up from the 0.6% decline last week. 

Unfortunately, this strength was all about the refinance index. It increased 8% after falling 1% last week. Refinancing activity has picked up because of the decline in interest rates.  As of last Thursday, the 30 year fixed rate on mortgages was 4.07% which is one basis point above its low on the year. I wouldn’t be surprised if the next weekly update shows it made new 2019 lows.

The purchase index fell 2% after falling 1%. Weekly purchase applications growth in May has been weaker than April. One excuse is the weather lately has been very wet as noted by Kohl’s on its latest earnings call. However, low interest rates should be boosting demand in this all-important spring selling season. I was expecting better numbers than this. 

As you can see in the chart below, it’s not as if the report was a disaster. Yearly purchase applications were still up 7% yearly.

Lower Homeownership Rate For Millennials

Homeownership rate for millennial is much lower than it was for prior generations. Millennials have come of age when there have been less homes built because of the past housing bubble. There are also restrictions on where builders can put up houses. Zoning laws are important to millennials because they like living in the city. If the homeownership rate is to increase in the next few years and the housing market is to recover this year, millennial demand will need to be strong.

As you can see from the chart below, in 2007 the homeownership rate for 30 years olds was almost 60%. As of 2016, it was 23 points lower. 

The most popular age range for first time home buyers is the low 30s. Student loan debt is a big factor preventing millennials from being able to afford mortgage payments. The buyer’s debt to income ratio needs to be low enough to satisfy lenders. This chart is slightly misleading because the homeownership rate was very high in 2007. That was a bubble peak which won’t be met again. It would be like comparing current tech multiples to the ones in 1999.

Fiscal Tailwinds To Weaken Next Year

Homeownership Rate - Congress is working on a budget deal which would also raise the debt ceiling. If the budget caps from the Budget Control Act of 2011 go into effect in fiscal year 2020, the drag on GDP growth will be 0.3%. 

As you can see from the chart below, the positive impact of the tax cut will fall next year. I often talk about the potential for a cyclical recovery next year, but there will be fiscal headwinds. However, even with the stimulus, Q1 GDP growth was terrible without accounting for trade and inventories being built. Hence, fiscal policy doesn’t determine growth.

If there is a trade deal by the end of this year, there will be an increase in economic activity because businesses are waiting for clarity before making big moves. There is also the illusive infrastructure plan which could boost growth. 

Even both though Democrats and Republicans support infrastructure spending, I don’t see this happening because they disagree on the implementation of the plan. Finally, the 2020 census will boost government hiring in the middle of the year. 

Fed Minutes: Muted Inflation

Homeownership Rate - The May Fed Minutes which were released on Wednesday tell us what it was thinking before the latest round of tariffs were enacted. Just keep that in mind when understanding the Fed’s perspective. A key word from the Minutes was “patience” which means the Fed won’t hike or cut rates at the next meeting. 

Fed doesn’t see cuts for the rest of the year, but it obviously can do so if something comes up. This is the sentiment that the President of the Atlanta Fed gave in his interview this week. That suggests, but doesn’t guarantee that the latest round of tariffs hasn’t changed the Fed’s mind on near term policy.

Specifically, the Fed stated, “Members observed that a patient approach to determining future adjustments to the target range for the federal funds rate would likely remain appropriate for some time, especially in an environment of moderate economic growth and muted inflation pressures, even if global economic and financial conditions continued to improve.” 

Fed has been stating that low inflation is transitory. It’s nice to see the Fed admit that inflation is muted. The Fed stating this on its own is dovish, but adding in the term “patience” eliminates that interpretation.

Furthermore, on inflation the Fed said, the "staff's assessment that the level to which inflation would tend to move in the absence of resource slack or supply shocks was a bit lower in the medium term than previously assumed." I don’t expect high inflation to be a problem even with the tariffs because of the cyclical weakness.

Homeownership Rate - Little Change To Rate Cut Odds

As a result of the Fed Minutes, the chance of a rate cut in June increased from 3.3% to 5%. However, that percentage is much lower than it was last week as it was at 13.3%. There never was a serious chance the Fed would cut rates in June. I highly doubt the odds of a rate cut in June will increase above 10% again. 

Usually the market locks in expectations a few weeks before the meeting. It is now 27 days away. The odds of at least one cut by the end of the year went from 65.1% to 69.7%. The market saw this statement as slightly dovish because of the mention of muted inflation.

It’s worth noting that the stock market declined slightly on Wednesday. Usually when the market increases, the odds of cuts decrease and when stocks fall, the odds of cuts rise. The Fed’s statements usually effect the Fed funds futures market more than the stock market on the day they come out. However, the stock market affects the odds everyday along with the economic data. 

Spread the love

Comments are closed.