- The West Coast is generally stronger than the East Coast, and urban areas are generally stronger than suburban. Within those generalities, there are exceptions.
- Overvaluation and oil prices are things to watch.
- Millennials are delaying their homebuying activity, but they are such a large group that this tailwind could be significant.
When Leigh Gallagher, assistant managing editor at Fortune magazine, asked two economists at Global Connect to recap the housing market, she got very different answers — perhaps unsurprisingly.
Allan Weiss, founder of Weiss Analytics, compared the housing economy to “90 million individual molecules, like the wind, and it’s a whirlwind.
“It used to all be blowing in one direction, but there are many different strands and it’s impossible to generalize. It’s moving in multiple directions,” he said.
Hui Shan, vice president at Goldman Sachs, had a more straightforward explanation: “We are in the second phase of recovery,” she said. After the first phase (2012-2013), the fundamentals, like job growth, are what will drive the housing market.
Are there regional strengths and weaknesses?
To generalize, said Weiss, the East Coast is not doing as well as the West Coast, urban areas are more robust than suburban areas, and rentals and condos are doing better than single-family.
Prices were higher to begin with on the East Coast, he explained. “New York is probably the most stable, but the lowest place with respect to how we measure the health of the market, which is the percent of houses rising,” Weiss said. Only 51 percent of houses in New York have rising prices; the other 49 percent are flat or falling. But the good news, Weiss said, is that the decline has stopped.
Regionally, Shan named two things to watch cautiously. “One is overvaluation,” she said. “We think a lot of the metro areas in California look expensive.”
The second risk is oil prices. “Oil prices are supposed to stay low,” Shan explained. “If that’s the case, we haven’t seen much of a decline in house prices in Houston or Midland, Texas.”
What macro indicators show the truth?
The most direct macro driver of the housing economy is mortgage rates, said Weiss — and they continue to fall. “If they go up, you’ll immediately see it impact the market, and I think that would be very damaging,” he said.
Supply and demand, said Shan. “Population growth, kids moving in with parents or forming their own households — that’s the demand side,” she said. “Supply side is inventory — is it coming up?”
And then the millennials
Weiss said that millennials will get pushed out of their parents’ homes when their parents decide to move back to the city — “which they’re doing,” he said. And although urban centers are more expensive, “wealthier boomers are doing it and millennials are figuring out a way to do it.”
Shan noted that housing demand is lower for millennials than previous generations, but it’s a huge cohort. There are more young adults than in previous generations living with their parents — that number is not going down, but not going up, Shan said. Not all millennials are buying, she said, but it’s a big enough group that the ones who are buying will make a difference.
But what kind of houses will they want?
“Nobody knows,” said Shan. “Survey data say they still want the same kind of houses, but there are signs that their preferences might be different.”
“They want more urban environments,” said Weiss. They’re more willing to live in a small space and willing to look at screens — a window into the entire world. “I think all of us feel less confined by physical small spaces,” he said.