Housing challenge could become long-term problem
Every generation stereotypes other generations, and Zoomers get plenty of stereotyping. Having raised a couple of these characters myself, some common perceptions about this age group are accurate, some are projected at their expense. Of course, the world is comprised of unique individuals, but some common behavioral threads I've observed: people in this age group tend to be financially frugal, more in touch with the mental health needs of themselves and those around them, aren't just comfortable with technology but actually command it with ease, and value work-life balance more than previous generations.
Some of these characteristics are likely a result of the collective experience (crisis after crisis) and economic conditions (relative prosperity) in which they came of age, but others are likely the consequence of the behavior of their Gen X parents. While us Gen Xers were raised in the parenting culture of "rub some dirt on it" or "walk it off," we largely adopted a more empathetic and perhaps overly attentive parenting style with our offspring.
The net effect of these factors seems to be young adult children who are educated and accustomed to economic and emotional security, while at the same time being apprehensive about their own skills and abilities and especially anxious about their own economic prospects for the future. Perhaps in no area is this collective economic anxiety experienced more so than in the current state of the housing market.
Generation after generation, young adults seek out much of the same goals. Get a job, get married, buy a home and have babies. This cycle of life has not changed -- the Zoomers in my life think in similar fashion.
While I might say the obstacles and worries facing young adults in this journey haven't really changed, the truth is some economic factors, largely in the form of the housing market, are presenting some unique challenges at this time, and the Zoomers are getting the short end of the stick.
Now, I know our Boomer friends out there will take what I'm about to say and think "ole Marc is getting soft," but interest rates really are a problem right now. Yeah, yeah, I know, most Boomers experienced mortgage rates in the 10% range somewhere in their young adulthood, and yeah, yeah, I know the Boomers managed to buy homes and raise families. All true. But we would be intellectually dishonest if we did not do the math including home prices and earnings levels in this discussion. When all these factors are included, the 7% mortgage rates and high home prices of today do present some serious difficulties when it comes to household formation, and something is going to have to give.
Perhaps this is best explained when looking at the Federal Reserve's home affordability data. Home affordability is not an overly complex calculation. Considered in the metric are the price of a house and the interest rate on the mortgage; these data points then determine the amount of income required to afford the home, and the amount of down payment to make the acquisition work.
When these factors are considered on a national average scale, the results indicate an income shortage or gap of about 30%. This means Americans on average do not make enough income to afford a typical home purchase by today's metrics. These conditions are historically not normal, and seem to be driven by some difficult-to-solve structural supply and demand issues. Unfortunately, it appears us current homeowners may be to blame.
Case in point. My mortgage has a rate of 2.75%. My monthly payment on a home large enough to raise four kids is $1,925. My 22-year-old son just moved into an 1,100 square foot apartment in Cincinnati for $2,100. I would be crazy to sell my home, and I don't plan to -- and I am not alone.
This collective sentiment has resulted in an environment where, for the first time ever, it is more expensive to purchase an existing home than it is to buy a brand-new home (source: St. Louis Fed).
This would imply the solution is to just build a bunch of brand-new homes. Over time, new housing supply may solve some of this problem, but when considering the complications involved with new home development, this is not likely to be a quick fix.
We are living through yet another unique economic period and our Zoomer kids are feeling the effects. Family formation and new household development is critical to economic growth -- if some of these challenges aren't resolved sooner than later, the longer-term effects could reach wide and deep.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Stock investing includes risks, including fluctuating prices and loss of principal. No investment strategy can guarantee a profit or preserve against loss. Past performance is not a guarantee of future results. Marc Ruiz is a wealth advisor and partner with Oak Partners and registered representative of LPL Financial. Contact Marc at marc.ruiz@oakpartners.com. Securities offered through LPL Financial, member FINRA/SIPC.
