Some housing experts predict the housing market in the U.S. will fundamentally change as millennials and their successors, Generation Z, mature and seek to rent rather than own. Others predict that rising interest rates will dampen the housing market.
All signs suggest that the U.S. housing market is moving into a period of strength and stability. These four specific elements will buoy the housing market over the next several years.
Low Interest Rates
A demand among investors for safe havens with reasonable yields has kept mortgage rates very low despite the federal funds rate increasing in December. Now, the Federal Reserve is signaling that it may delay future rate hikes, which points to mortgage rates remaining at rock-bottom levels for the foreseeable future.
For some context, 30-year mortgage rates at or below 4% are an anomaly. Over the last 225 years, mortgage rates have fluctuated constantly. But the average rate hovers around 6%. From this historical perspective, rates remain very affordable for homeownership.
Job and Wage Growth Are Strong
There are a number of ways to slice and dice the employment figures released by the U.S. Bureau of Labor Statistics, but the trend line has clearly been overwhelmingly positive. After hitting an alarming 10% unemployment rate during the depths of the recession, the U.S. economy has recovered to a healthy 4.9% unemployment. Wages have been rising as well, which is a great sign for the average homeowner or renter looking to buy. According to the Labor Department's January report, average hourly earnings increased 2.5% year-over-year.
Millennials Are Maturing
The theory that millennials will eschew homeownership in favor of renting forever is proving to be only a theory. The oldest millennials are now in their mid-30s, and are forming families and entering a phase of life where living in a home they own is suddenly very attractive. They may be late to the homeownership party, but they are not going to stay away altogether. A combination of factors has delayed the inevitable surge of homeownership by a generation that is now the nation's largest in terms of population. Student debt, a lack of affordable inventory and a desire for a different housing product has all played into their delayed entry into homeownership. But 75 million Americans who are forming families and advancing in their careers will not hold out forever. Expect them to have a large impact on the housing and mortgage market for decades to come. One of the largest transfers of wealth in U.S. history is also about to take place. Over the next decades, a total of more than $30 trillion will be passed from baby boomers to millennials, fueling a housing boom that will be strong and long-lasting.
It's no secret that the housing meltdown damaged millions of people's credit. Many of these homeowners have been sitting tight during the two- to seven-year waiting period for their loan eligibility or credit to be repaired. Since the waiting period typically starts at the date that the foreclosure or short sale was finalized, many of these "boomerang buyers" are only now back in the market for a home. RealtyTrac estimates that more than 7 million Americans lost their homes in the recession. These boomerang buyers are on a rolling schedule of eligibility for government-backed mortgages, or to be in a position where their credit score is fully repaired. The number of boomerang buyers eligible to return to homeownership will surge over the next year, peaking in 2018 at more than 1.5 million.
The U.S. housing market is subject to several cyclical factors such as mortgage rates and economic cycles. But a convergence of favorable factors in wage and job growth, mortgage rates and population trends, will provide underlying strength for a stable and steady housing market in the near future.
Ali Vafai is president of the lender-servicer The Money Source.