Feb062015

Are Millennial first-time homebuyers finally active?

There is no evidence Millennials are becoming more active in the housing market, but hopeful anecdotes warm the hearts of realtors and homebuilders.

Ever since the collapse of house prices and sales in 2007, homebuilders, realtors, and everyone else who depends on real estate sales finds a new Messiah each year that will save the housing market. Each year they are disappointed.caddyshack_turd_ihb

For the last two years it was the boomerang buyer, those former homeowners who were supposed to return to the housing market in droves. Of course, they didn’t, and the false hope and wishful thinking resulted in dashed hopes for 2014.

For 2015 the false hope and wishful thinking is centered on Millennials, those born approximately between the early 1980s and early 2000s, who will soon become the majority of the workforce and the next generation of homebuyers.

The Millennials currently cope with excessive student loan debt, which is preventing them from buying houses. They are also delaying marriage, and they are not forming new households at the same rate as previous generations.financial-media

Most housing market analysts blithely assume Millennials will follow the same path as preceding generations once they have opportunity, but what if Millennials decide not to buy homes? Homebuilders don’t want to think about that possibility.

MOPE (Management of Perspective Economics) is the false belief that economists and the media can stimulate economic growth and activity by convincing the public the economy is vibrant when it’s really not. This erroneous idea (plus the innate desire to please others) drives most reporting in the financial media.

You can recognize MOPE by the use of anecdotes from realtors and economists, two completely unreliable sources, and the limited use of any real data. Today’s story about Millennials is loaded with hope and MOPE.

Millennials are finally entering home-buying market

By Kenneth R. Harney, February 1, 2015caddyshack_toxic_mortgage

Call them the prodigal millennials: Statistical measures and anecdotal reports suggest that young couples and singles in their late 20s and early 30s have begun making a belated entry into the home-buying market, pushed by mortgage rates in the mid-3% range, government efforts to ease credit requirements and deep frustrations at having to pay rising rents without creating equity.

Listen to Kathleen Hart, who just bought a condo unit with her husband, Devin Wall, that looks out on the Columbia River in Wenatchee, Wash.: “We were just tired of renting, tired of sharing with roommates and not having a place of our own. Finally the numbers added up.”

Finally the numbers added up? House prices were higher while incomes were stagnant for 2014. How did that improve the numbers?I_just_want_it

The reality is they were just ready to buy. Most people don’t time the housing market, despite the strong need for good timing, and buy when it’s the appropriate time in their life cycle.

Erin Beasley and her fiance closed on a condo in the Capitol Hill area of Washington, D.C., in January. “With the way rents kept on going,” she said, “we realized it was time” after five years as tenants. “With renting, at some point you get really tired of it — you want to own, be able to make changes” that suit you, not some landlord.

This is true, but it’s an emotional decision being rationalized by the increasing rent, not a sound financial decision in search of emotional support.

Hart and Beasley are part of the leading edge of the massive millennial demographic bulge that has been missing in action on home buying since the end of the Great Recession. Instead of representing the 38% to 40% of purchases that real estate industry economists say would have been expected for first-timers, they’ve lagged behind in market share, sometimes by as much as 10 percentage points. But new signs are emerging that hint that maybe the conditions finally are right for them to shop and buy:

•Redfin, a national real estate brokerage, said that first-time buyers accounted for 57% of home tours conducted by its agents mid-month — the highest rate in recent years. Home-purchase education class requests, typically dominated by first-timers, jumped 27% in January over a year earlier. “I think it is significant,” Redfin chief economist Nela Richardson said. “They are sticking a toe in the water.”

OCRedfin’s former reporter economist consistently fails to recognize that growth in Redfin’s business is not a proxy for strength in the housing market. Her thoughts about what’s significant might have impact if she had competence or credibility.

•The Campbell/Inside Mortgage Finance HousingPulse Tracking Survey, which monthly polls 2,000 realty agents nationwide, reported that first-time buyer activity has started to increase much earlier than is typical seasonally. First-timers accounted for 36.3% of home purchases in December, according to the survey.

A survey of realtors? LOL! That’s reliable data, not.

•Anecdotal reports from realty brokers around the country also point to exceptional activity in the last few weeks. Gary Kassan, an agent with Pinnacle Estate Properties in the Los Angeles area, says nearly half of his current clients are first-time buyers. Martha Floyd, an agent with McEnearney Associates Inc. Realtors in McLean, Va., said she is working with “an unusually high” number of young, first-time buyers. “I think there are green shoots here,” she said, especially in contrast with a year ago.

Anecdotes from individual realtors? Even stronger evidence, right?oh_noo_koolaid

Assuming these early impressions could point to a trend,

Why would anyone make that assumption?

what’s driving the action? The decline in interest rates, high rents and sheer pent-up demand play major roles.

Remember, anywhere, anytime the nonsense words “pent-up demand” appear, person saying it is evoking wishful thinking and displaying desperation.

But there are other factors that could be at work. In the last few weeks, key sources of financing for entry-level buyers — the Federal Housing Administration and giant investors Fannie Mae and Freddie Mac — have announced consumer-friendly improvements to their rules. The FHA cut its punitively high upfront mortgage insurance premiums and Fannie and Freddie reduced minimum down payments to 3% from 5%. …

This will have an impact. (See: Lowering FHA insurance fees will spur the housing market)cheerleading

Bottom line: Nobody knows yet whether or how long the uptick in first-time buyer activity will last, but there’s no question that market conditions are encouraging. It just might be the right time.

I think there is some question on that point. Personally, I would prefer to see real data showing a significant increase in first-time homebuyers before celebrating the return of Millennials.

If Millennials do return in 2015, it will largely be due to low mortgage rates. As I stated in Bold California housing market predictions for 2015, everything depends on mortgage rates.

If mortgage rates remain below 4.25%, both sales and house prices will rise next year. The economy is improving, and with an improving economy will come increased demand. If this demand is amplified by super-low rates, housing will do well.

If mortgage rates settle between 4.25% and 4.75%, sales will be down while prices drift slowly upward. A reduction in sales volume always proceeds price, and as long as mortgage rates stay below 4.75%, the pressure on pricing won’t be enough to overcome the inventory restrictions of cloud sellers.enticed

If mortgage rates rise above 4.75%, sales volumes will be severely impacted and prices may drift gently lower. The increased cost of financing will not allow buyers to bid high enough to support current prices. The discretionary sellers active in the market will be forced to lower their prices if they want to sell. The activity of these few discretionary buyers will cause prices to drift down at higher mortgage rates.

If mortgage rates rise above 5.25%, the housing market will be a catastrophe. Homebuilders won’t be able to sell anything, homebuilding unemployment will rise, triggering a recession, and the housing market will experience record low sales volumes and prices 5% or more below today’s levels. I consider this scenario very unlikely largely because the federal reserve would never allow it. They will start buying mortgage bonds again before they let housing kill the recovery.


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