With the housing market back on its feet and Millennials entering the workforce, the economy is on the rise and it doesn’t seem to be slowing down just yet. Bill McBride from Calculated Risk (who warned us about the housing bubble) has detailed why he is optimistic about the economy going forward.
1) Housing starts are increasing and will continue to do so.
If we take a look at the following graph, we can see a positive trend for total and single family housing starts. Although starts are still below the average level of 1.5 million per year from 1959 through 2000, demographics and household formation suggests that starts will increase by 25% over the next few years, bringing us back to the average.
Typically the best leading indicators for the economy are residential investment and housing starts, so this suggests that the economy will keep growing.
2) Deleveraging is over and delinquency rates are improving.
This next graph from the NY Fed shows that aggregate household debt has been increasing for the past 3 years, suggesting that deleveraging has overall ended.
According to Wilbert van der Klaauw, senior vice president at the New York Fed, “Delinquency rates and the overall quality of outstanding debt continue to improve. ...This improvement is in large part driven by mortgages.”
3) Household cash flow is in much better shape than several years ago.
This graph from the Fed’s Household Debt Service and Financial Obligations Ratios show the percent of disposable personal income (DPI) dedicated to debt service (DSR). The overall ratio has decreased significantly since 2008 and has been steady for the past few years. With Household DSR and Mortgage DSR at near record lows, households have much better cash flow than in previous years.
4) Millennials will boost the economy.
As we talked about last week, well-educated and tech savvy Millennials are about to start settling down and start families, hopefully leading the next housing boom. Demographics alone are an important determinant of economic growth. The graph below shows that the prime working age group is starting to grow again and should boost economic activity for the years ahead.
Read the original article here.
James Wagoner commented July 30, 2016
I too am bullish on real estate and the economy in general. But we should evaluate that last graph (Prime Age Population) a little more closely. True, many more young people are aging into that demographic, but we cannot assume that they all have the same dream or ability of home ownership. These folks are far more mobile, and much more likely to rent for longer periods, rather than buy a home. Note that home ownership rates of young adults age 22-34 have dropped from 42% in 1975 to 28% in 2010. (Zillow study)
I suggest that home ownership is very much still the american dream, but it will be delayed. People are more likely to buy their first home at 35 or 40, rather than 25 or 30.
But all this bodes well for the real estate market. Perhaps we will have a sustained long term growth, rather than a bubble!