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New Twists to the New Normal

By Brian Kline | May 13, 2018

The residential real estate market is once again entering new territory. The major factors are Millennials as the new economic driving force, low inventory for sale, and rising interest rates.

Average house values across the U.S. vary greatly with the highest values being on the east and west coasts and lower values inland. As of March 31, Zillow calculates the national median value (half above and half below) at $213,146.  Home values appreciated 8.0% this past year and are forecast to rise 4.2% during the next year. Although it changes by the day, the average rate for a 30-year fixed rate mortgage is currently hovering around 4.4%. According to National Association of Realtors®, the March existing house inventory stood at 1.67 million units, down 7.22% from a year ago.

Supply is tight, prices are soaring, and mortgage rates are rising. That sounds like a recipe for the market to tank. Contrary to that data, consumer confidence in the residential real estate market is at an all-time high according to a monthly sentiment index from Fannie Mae. Of the six components in the index, not surprisingly, the only component to decline is sentiment that it is a good to buy.

The median age for a first-time homebuyer in the United States is 31—squarely in the millennial generation. Most millennials have a paradigm about life that is very different from baby boomers. Whereas baby boomers sought to buy their first home at an early age and spent most of their wage earning years planning for retirement, millennials are living life first with little or no thought about saving for retirement. Even if they do think they might retire around age 70, that’s a long way off and the world is changing much too fast to predict what that means.

Maybe new homebuilders figured out something about millennials that is only now becoming clear to many of us. That is millennials aren’t planning to buy starter houses at a young age the way baby boomers did. The trend appears for millennials to start with what baby boomers considered to be “move-up” homes. Bigger and nicer homes appropriate for when the 2nd and 3rd children came along.

That is probably going to be a financial challenge for millennials who are not known for their saving’s power. When you live life to the fullest today, you tend to spend almost everything and save almost nothing. What’s different about this generation is they have waited until they are entering their peak earning years to buy a first home. This means the higher prices and higher interest rates may not be insurmountable hurdles to homeownership.

Keep in mind that these rising interest rates are coming off historic lows. Nowhere near the 15 to 18% rates that baby boomers faced in the 1970s and 80s. On the other hand, lack of inventory will be much more difficult to overcome. Rich coastal cities like NYC are now seeing a glut of high-end (unaffordable) homes on the market. This may indeed be a bubble about to burst – but only at the high end. If market dynamics work correctly, high costs and low inventory should create a competitive but sustainable market in the middle tier. Prices should stabilize - right in the middle tier where millennials are buying. One major indicator is price increases are forecast to only rise 4.2% in the coming year. This is in line with how much millennials can expect their buying power to grow.

New homebuilders favoring the next tier up looks to be a smart move. Builders are in the market that the major consumer group is favoring. The next question to ask is what will happen farther down the road? If millennials are starting with a bigger first home, will there be a “move-up” market 7 or 8 years from now? Or will millennials further redefine the market by buying once and staying put until retirement – which they aren’t planning for.

Still, the baby boomers did plan and save for retirement. This means that although they are declining as market movers, they aren’t out of the game. There are enough of them, with enough money to define retirement communities as they see fit.

There is plenty of room for your thoughts here. Please leave your comment.

Author bio: Brian Kline has been investing in real estate for more than 35 years and writing about real estate investing for 12 years. He also draws upon 30 plus years of business experience including 12 years as a manager at Boeing Aircraft Company. Brian currently lives at Lake Cushman, Washington. A vacation destination, a few short miles from a national forest. With the Pacific Ocean a couple of miles in the opposite direction.

Brian Kline has been investing in real estate for more than 30 years and writing about real estate investing for seven years with articles listed on Yahoo Finance, Benzinga, and uRBN. Brian is a regular contributor at Realty Biz News
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