Tired of hearing about the Millennials? What they want from work. Where they want to live. What color of socks they prefer. If you’ve had your fill of Millennial talk, you’re not alone. Even Millennials are tired of hearing about Millennials.
So this month we’ll ignore the Millennials, and take a look at the next emerging generation: the Centennials. But first the market data from last month.
August was a good month for buyers and sellers. As expected, the frenzy has calmed a bit, giving buyers an easier path to the closing table. At the same time, sellers still enjoy the benefits of strong demand, low inventory and prices that are typically 5% or 10% higher than last year.
The volume of real estate sold across all Front Range markets increased 5.7% on a year-over-year basis. On a month-over-month basis, sales volume increased 1.2% in August, defying the typical end of summer slow down and perhaps signaling a strong finish for 2016. The inventory of homes for sale remained a scant 1.7 months, putting a temporary hold on any movement to more balanced inventory levels of 5 to 7 months.
While everyone was talking about the Millennials, a new generation came along. Allow us to introduce the Centennials – also referred to as Gen Z, which naturally is the name we prefer to use at 8z.
Members of Generation Z are currently aged 9 to 21 and will be buying homes before we know it. There are 55 million of them, about 17% of the US population. Gen Zers are digital natives who don’t make much of a distinction between the physical and digital worlds. They are mobile first and expect to access content on demand (YouTube, Netflix) on their phone anytime, anywhere. The first thing a Gen Zer does when arriving at a new location is ask, “what’s the WIFI password?”
What do Gen Zers think about real estate? They love it. In fact, 97% of Gen Zers believe they will one day own a home, according to a recent survey of more than 1,000 teens. 82% say homeownership is the most important part of the American dream, beating out other life goals like getting married, having children, or going to college.
Of course, young adults of all generations have always had aspirations. Gen Zers, however, are more than just dreamers. They are realists and they are financially savvy. Asked for an estimate of what they might spend on a house, aspiring homeowners gave an average response of $274,323—strikingly close to the median US home value of $273,500.
In fact, some of them have already started saving, three in five according to a recent survey. Gen Zers, on average, aim to own a home by age 28—three years earlier than the median age of first-time homebuyers reported by the National Association of Realtors.
The impact of Gen Zers on the real estate market, of course, is limited at this time due to their young age. The Baby Boomers still rule the supply side of the equation. Boomers control nearly 66% of today’s US home equity. The Millennials are taking over the demand side as they enter the prime home buying years. But wait, what about the Gen Xers you ask? They were left out, but that’s ok, they’re used to it. They’re enjoying their own rising home equity along with the rest of us.
Enjoy the beautiful Autumn weather!
Market Perception vs Reality
Lane Hornung goes out of his way to read every negative article he can find on the housing market. Lane, CEO of 8z Real Estate, reads articles discussing outlooks for the housing market both in the Denver/Boulder metro area and in the Bay area of Northern California, as well as national pieces. He has no shortage of reading material. But he isn’t impressed.
“I’m finding there’s no there, there” Lane said. “It seems there is this general anxiety and prices have to come down, but really, there is no data behind it.”
The perceived market vs. the reality of the market, is the subject of this month’s question and answer session between Lane and John Rebchook, of Denver Real Estate Watch.
John: Lane, why do you think so many people, even among the real estate ranks, seem to think the market is heading for a fall?
Lane: I understand the general anxiety. We’ve had 54 months of year-over-year price increases.
John: So people are saying what went up, must come down?
Lane: Real estate is both a cyclical and a seasonal industry. People think we’ve had a nice long run, so prices have to come down.
John: Is that a correct assumption?
Lane: You really have to look at the data. The data doesn’t support that the sky is falling. First, you have the surprising, yet welcome news that the median family income surged 5.2% according to the Census Bureau. In both Colorado and the Bay area, we have low unemployment and lots of in-migration. Interest rates remain unbelievably low. We are seeing more household formations.
John: What does that tell you?
Lane: These really are perfect conditions for selling and buying homes, and support a healthy market.
John: Then why are we hearing so much doom and gloom?
Lane: Part of it is general anxiety about macro-events being left at the door of housing. We are in the midst of an uncertain and unusual presidential election. There is always some type of geopolitical turmoil happening in the world. People are worried that something could happen that would impact the U.S. and global economies. But you can’t predict those things, commonly known as Black Swan events.
John: Is part of it also misreading the data?
Lane: Yes. For example, the Denver Post ran a headline saying home prices had dropped in July. But if you read the article, prices dropped from June to July. I went back and looked at the data. For seasonal reasons, prices almost always drop from June to July. Prices were actually at a record high for July. (Prices were up about 13 percent year-over-year, at a time when the inflation rate was less than 2 percent.)
John: Why is it more important to focus on the year-over-year statistics than month-over-month changes?
Lane: Looking at the year-over-year data accounts for any seasonality difference. For example, in July you had the 4th of July holiday. Also, that month it was the mix of homes that changed, not that prices dropped. If you look at data from Case-Shiller and CoreLogic, which look at paired, same-home sales, you see that in markets like Denver and the Bay area, prices have continued to rise.
John: Lane, do you think this double-digit appreciation, or high single-digit appreciation can continue forever?
Lane: Not likely, although not impossible. But there is no magic ceiling where home prices have to stop rising. Look at how incredibly expensive real estate prices are in places like Tokyo. I personally think we are going to see home price appreciation settle down to 6 percent to 7 percent in the Denver area. But a 6 percent increase on top of all of the appreciation we have already experienced is a long way from a collapse of home prices.
John: So I guess the takeaway is not to believe everything you read?
Lane: Increasingly with housing, that seems to be the case. It’s unfortunate, because if a consumer simply reads a headline that home prices are falling, it gives them a misleading impression on what is really happening in the market.