One of the foremost economists covering the housing market is Celia Chen with Economy.com. Over the next three issues we will be covering her latest U.S. Housing Outlook, just released. In Part I we summarized her key projections and what conditions have brought the market to todays conditions. This issue we cover the roll of young adults and first-time buyers.
Young adults hit hard
The Great Recession constrained household growth, and the subsequent weak job expansion has kept household growth below normal. Young adults have been hit particularly hard, with the number of people in their 20s who are unemployed or out of the labor force and living with their parents growing by around 1.5 million since the recession. Household formation will likely be stronger than typical over the next few years. Once they find jobs, these young adults will quickly form households, helping to boost new housing demand.
Ahead: The launching of young adults will benefit multifamily units in particular, but better job prospects will also help those ready to take the step to homeownership.
First-time homebuyers are key to the housing rebound
The typical first-time homebuyer is about 30 years old, and income gains for younger households have been weaker than average. Median household income was flat from 2008 to 2012 for households aged 25 to 34 years. Growth in the median income for all households was weak but did advance by 0.8% per year. Job and income growth will accelerate and help first-time homebuyers overcome rising house prices and enter the market.
Moreover, access to mortgage credit will improve, making it easier to finance a home purchase. Credit remains tight, but mortgage lenders are expected to ease lending standards in coming months. With refinancing activity dormant given the increase in mortgage rates, lenders are eager to originate more home purchase loans. Better mortgage credit quality should also encourage more aggressive lending, as should the decline in lenders battles with Fannie and Freddie over representations and warranties. Lenders should also soon feel more comfortable with the recently implemented qualified mortgage rule.
Ahead: Conditions will improve for first-time buyers and their presence is necessary to compensate for waning investor demand.
The next issue of Economic Focus will feature Part III, covering Supply issues and price growth.