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An Easy Start to Housing for August/Homeownership and Wage Rates Over the Decades

August 8, 2016

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We mentioned that with the Brexit vote fading into a distant memory and the lack of any important news pending domestically or internationally, financial markets would likely go on hiatus. We even predicted that lending rates we saw last week would persist into this week and beyond.   

So far, we’re right. Rates haven’t done much of late, and we shouldn’t be surprised. Second-quarter gross domestic product (GDP), reported last Friday, wasn’t particularly encouraging. Growth posted at a 1.2% annualized rate, below most economists’ expectations.   

No need to fret, though. Within the GDP report, nuggets of good news could be found; most could be found in housing. Residential investment remains robust. The segment includes new single-family structures, multifamily structures, home improvement, brokers’ commissions, and other ownership transfer costs.

Current investment in single family homes is roughly 1.3% of GDP. From a historical perspective, that’s low. Annual single-family-structure investment has historically averaged between 2% and 2.5% over the past 55 years.  

People frequently overlook this fact – investment drives the economy as much as spending. Residential investment should continue to do its part to drive the economy forward.  

 

Homeownership and Wage Rates Over the Decades

The latest data from the US Census Bureau show the homeownership rate in the United States at its lowest level since the bureau began tracking the rate in 1965. As of the second quarter of 2016, the homeownership rate had dropped to 62.9%.

Many commentators point to the rise in consumer debt or lack of income growth for the downward trend in homeownership. We’re not so sure.  

A lot has been said about rising consumer debt, particularly debt tied to student loans. Indeed, student-loan debt has trended higher, rising to $29,000 in 2014 from $18,550 a decade earlier, according to Institute for College Access and Success data. Roughly 70% of graduating seniors graduate with some debt, though it may not be quite as out of hand as some pessimistic prognosticators lead us to believe.

Consumer debt as a percentage of disposable income stands at 5.5%, where it was 25 years ago. For younger people, student-loan debt might comprise a larger percentage of overall debt, but if the debt is used to fund an education that leads to a marketable degree, it’s really an investment.

As for income, it’s true: Real wages have stagnated, but they’ve stagnated since 1964. (Real wages are wages adjusted for inflation.

Demand more than anything points to a trend reversal. The vast majority of us prefer to own than to rent a home. This preference also resonates with younger adults. Surveys from Fannie Mae continually show that over 90% of millennials are optimistic they will eventually own a home,

In short, we don’t see a problem with the current homeownership rate, because we see the opportunities that will arise when it trends higher.

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