Housing Sector Showing Promise

Brian Selzer

OCEAN CITY — Amid growing concerns over Greece, Puerto Rico and China, signs of economic improvement in the U.S. continue to sprout – notably in the housing sector. Recent data suggests the sector’s growth is likely to improve steadily in the near term. What’s important is that strength in the housing sector has historically had positive knock-on effects for consumer confidence and, ultimately, consumer spending.

In a sea of worry about global debt, stronger U.S. housing data gives us confidence that U.S. economic growth for 2015 remains intact.

Data for April indicates housing starts were up 20% over last year, to over 1 million starts – a level last reached in 2007. The growth was complemented by both new and existing home sales, and the strength looks set to continue, at least in the near term, as permits (needed before building) increased in both April and May. This growth is increasingly set against a backdrop of a recovering U.S. consumer. More than twelve million jobs have been created since the trough in 2009, and Americans have been increasing their savings and paying down debt.

Notably, debt burdens for the average American have dropped to record lows (of 9.9% of total disposable income), according to the Federal Reserve’s Household Debt Service Ratio1, and home mortgages that are 30 to 60 days delinquent have fallen to levels last seen in 2000.

The positive trends in consumers’ health and their willingness to commit to rentals and new homes should translate into higher home prices in 2015, to the tune of 3.7% annual growth on average, according to BofAML Research. The importance of housing growth for the economy is

hard to overstate. The typical related purchases of durable goods (washing machines, air-conditioners, etc.) and their ongoing upkeep and maintenance add to economic growth over a long cycle, typically a generation. Even though prices have risen, the “low for longer” interest rate environment should maintain housing affordability and support the housing recovery.

Over the medium term, demand for housing stock is likely to change. Beyond 2015, two developing trends will influence demand and change the composition of housing in the U.S. These trends fall at the opposite ends of the homeowner age spectrum: millennials, who continue to demonstrate a preference for renting as they redefine their social relationships, and baby boomers, who are increasingly transitioning into retirement housing (and even renovating their existing homes for retirement).

For millennials, or those born between 1980 and 2000, we see the 2008 financial and real estate crisis as having scarred their views on housing and how leverage can affect one’s net worth.

Couple this with large amounts of outstanding student loan debt ($1.2 trillion, according to the New York Federal Reserve) and a tougher labor market with less job security, and you have a recipe for flexibility – via renting an apartment rather than buying a home. It’s no surprise that apartment construction is up strongly.

For aging baby boomers, or those born between 1946 and 1964, the transition is different. The demand for incremental health care services means many seniors consider assisted living arrangements either in their existing (or downsized) homes or, increasingly, in newly built facilities. Baby boomers are reshaping the assisted living industry, including through such setups as home based assisted living. According to BofAML Research strategist Sarbjit Nahal, over 80% of baby boomers prefer to remain at home for as long as possible. Spending more years in their homes should translate into more years spent on their homes.

(A Merrill Lynch Wealth Management Advisor who can be reached at 410-213-8520.)

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