House

If you were from the future and could travel back in time, you would consider coming back to today to buy your home. Last week the Bureau of Labor Statistics released their Jobs and Openings and Labor Turnover Survey (JOLTS) report that outlines the employment picture of American business.  The report stated that job openings of 5.6 million had little changed from June.  Moreover, layoffs and discharges remain at 1.1% which is the lowest rate since 2001.  The Bureau summarized the employment situation as:

“Over the 12 months ending in June, hires totaled 62.3 million and separations totaled 59.8 million, yielding a net employment gain of 2.5 million. These totals include workers who may have been hired and separated more than once during the year.”

Now that U3 Unemployment Rate has dropped below 5% confirms more people are working since the 2008 recession albeit with slower income growth.

So with more people working in seven years and mortgage interest rates at 40-year lows, why is home ownership of 62.9% at 51-year low?  Reported in the Wall Street Journal,

“In all, some 200,000 to 300,000 fewer U.S. households are purchasing a new home each year than would during normal market conditions.”

One key reason for declining first time home ownership is millennials remain MIA in the housing market.  Understandably, millennials have many reasons to stay on the sidelines due to priorities on lifestyle, aversion to debt, or simply after watching family or friends lose their house after the 2008 crisis don’t see the value of owning their home.

However, millennials are missing out on one of the greatest wealth building opportunities this century and if they wait too long may be renters for the rest of their life.  The asset class of single family houses (SFH) is one of the few assets classes that Americans must have, and demand is increasing every year with every June college graduation.  What is not well reported is that as demand continues to grow every year the supply of available housing is shrinking.  As discussed in our Podcasts and previous blogs, new construction has not been keeping pace with new family growth.

In the same Wall Street Journal article, it states:

“The pace of new home construction remains at levels typically associated with recessions, while the homeownership rate in the second quarter was at its lowest point since the Census Bureau began tracking quarterly data in 1965 and the share of first-time home purchases remains mired near three-decades lows.”

Why do non-home owners care?  Rising demand for a shrinking available supply is the classic formula for appreciation while mortgage rates are near 60-year lows at 3.5% before taxes.  As a result, home prices rose in 83% of 178 major real-estate markets in the second quarter, according to figures released last Wednesday by the National Association of Realtors. freehouses2 Throughout areas of the US, house prices are near or at their peak prices reached in 2006 according to the S&P CoreLogic Case-Shiller Indices.  In our area of Northern California, home prices have increased 200%+ since 2010.  Wealth building through home ownership has not been this good for decades.

More concerning for renters, is rising demand for houses is pushing up rents that are squeezing tenant budgets.  The housing market is akin to a big wide river and homeownership is owning a canoe floating down the river with the currents.  If you are without a boat and standing in the river, you are not going anywhere, and the ability to catch up gets harder every year.

Don’t let the housing crisis of 2050 – 2010 be the hook you hang your rationale hat of not owning your home.  All asset classes go through cycles and housing is no different.  The time to buy is after a significant correction, and as mentioned earlier, everyone needs to live somewhere so the chances are high that your home price will recover after a correction and continue to increase in value years later.

The best time to plant a tree was 20 years ago.  The second best time is now.  Yes, buying a house in 2010 or about anytime in the past six years you would most likely have equity and security of your homeownership. The second best time to buy is now.