Millennials not quite ready for prime time

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Published Date 3/26/2018

Realtor Report

Millennials not quite ready for prime time

We look back to the war generation as the one that built and flocked to America’s suburbs (cue Back to the Future). Their kids, the Baby Boomers, came along and those numbers multiplied. But it’s Boomers’ kids — Millennials — that are now the largest living generation. And according to Freddie Mac’s March Insight report, they are falling short of dominating the housing market.

Freddie Mac’s latest report looks at the young adult generation, as those born from about 1980 to 1994, with the youngest Millennial turning 24 this year. And experts are beginning to wonder what’s keeping this mass of potential homebuyers from entering the housing market.

As of 2016, there were about 45 million young adults aged 25 to 34 in the U.S. — four million more than those aged 35 to 44, according to the U.S. Census Bureau. Freddie Mac explained that a population of this size should be fueling the housing market. Why aren’t they? The headship rate.

The headship rate is the percentage of those heading a household, and among young adults age 25 to 36 this figure was down 3.6 percentage points in 2016 compared to 2000. If Millennials formed households at the same rate seen in 2000, this could have resulted in 1.6 million additional households in 2016.

But while lack of household formations could seem to be holding Millennials back from entering the home buying market, Freddie Mac suggested it could actually be the reverse. The government-sponsored research indicates the two biggest factors explaining the decrease in household formation rates are housing costs and labor markets.

While real median home prices increased by 29% from 2000 to 2016, young adult per capita real incomes increased by only 1%.

But that doesn’t mean things can’t change.

The household formation rate could soon drastically increase, bringing a new wave of demand to the housing market, according to the study. Freddie Mac explained that even if it happens later than in previous generations, Millennials should soon begin to enter the housing market in greater numbers, with Millennials as well as their younger brethren (Generation Z) adding somewhere between 19 and 21 million additional new households by 2025.

“We expect that as life progresses and today's young adults age, they will add around 20 million households to the U.S. economy, driving housing demand over the next decade,” said Len Kiefer, Freddie Mac deputy chief economist. “But, housing costs are a major factor holding back young adult household formations.”

According to a study done by Pew Research of U.S. Census data, today’s young adults are also more likely to be living with their parents for an extended stay compared with previous generations. As of 2016, 15% of 25- to 35-year-old Millennials occupied their childhood bedrooms or their parents’ basements, a full 5 percentage points higher than the share of GenXers who lived in their parents’ home in 2000 when they were the same age (10%), and nearly double the share of the Silent Generation who lived at home in 1964 (8%).

Source: TBWS

This Week's Mortgage Rate Summary

How Rates Move:

Conventional and Government (FHA and VA) lenders set their rates based on the pricing of Mortgage-Backed Securities (MBS) which are traded in real time, all day in the bond market. This means rates or loan fees (mortgage pricing) moves throughout the day, being affected by a variety of economic or political events. When MBS pricing goes up, mortgage rates or pricing generally goes down. When they fall, mortgage pricing goes up.

Rates Currently Trending: Neutral

Mortgage rates are trended sideways today. Last week the MBS market worsened by -3bps. This wasn't enough to move mortgage rates higher. Mortgage rate volatility was low week.

This Week's Rate Forecast: Neutral

Three Things: These are the three things that have the greatest ability to impact mortgage rates this week: 1) Geopolitical, 2) Treasury Dump and 3) Fed.

1) Geopolitical: While the White House has nailed down a new trade agreement with South Korea, they are working round the clock with China over intellectual property. China's threat of slapping the U.S. with tariffs on 128 different imports to China is not as important as their "veiled" threat to stop buying up our debt in the form of Treasuries. Scarier still is if they started to dump Treasuries which would drive up global interest rates.

2) Treasury Dump: The Treasury will auction off $294 billion of bills and notes this week. Its largest slate of supply ever as the Treasury is attempting to lock down as much debt as they can at slowing rising rates before the rates increase even further which would drive up the service costs on our massive debt that is set to grow even larger with the newly passed spending bill. Here is a list of Treasury note auctions this week, there are also smaller (6-month bills, etc) that are too short-term concern bond traders:

03/26 2 year note
03/27 5 year note
03/28 7 year note

3) Fed: The markets will continue to watch stories that the S.F. Fed President Williams will replace Dudley as the NY Fed which is a permanent voting position. Here are the scheduled speeches this week:

03/26 Dudley, Mester
03/27 Bostic, Quarles
03/28 Bostic
03/29 Harker

This Week's Potential Volatility: Average

Mortgage rates have been moving sideways essentially all year. This week, with the holiday, we expect the same with relatively low volatility. The three things above, particularly geopolitical, are the only things that are likely to move rates.

Bottom Line:

If you are looking for the risks and benefits of locking your interest rate in today or floating your loan rate, contact your mortgage professional to discuss it with them.

Source: TBWS

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