Last week, we discussed the language and principles of demographics: terms, definitions, concepts, and how demographic trends manifest themselves in the broader economy. This week, we used these concepts and principles to make projections about the future. Demographics is destiny, as they say, and the demographic makeup of the US population will determine our economy’s performance for decades to come. By knowing what is likely to occur in the near- to mid-future, we can start making decisions that will put us in better financial positions once the future arrives.
It has been true for several years that it is cheaper to own a home than to rent: $1,000 worth of a mortgage offers a lot more than $1,000 worth of rent. While historically low interest rates play some part in this, most of the credit goes to demographic trends that have caused an overabundance of inventory in the real estate market and high demand for rental units. Young people are waiting longer than ever to get married and have kids, and they generally prefer to rent apartments during their 20s and early-30s than commit to a house. Baby Boomers have been downsizing to smaller homes as their kids move out. In the past, the next generation would have moved into those vacated houses. However, Generation X is simply too small to purchase all these homes so demand is extremely weak.
Demand for these homes will increase drastically once the Millennials come of age. First, lifestyle choices will eventually push Millennials toward homeownership: getting married, having kids, and starting a career all lend toward an individual wanting to own a home. Second, economic factors that include the Millennials reaching their peak productive years will reinforce this trend. As the economy booms, Millennials will feel more financially secure and will find it easier to commit to a mortgage.
We know this will occur because there are already +76 million Millennials racing toward economic maturity. It’s not a matter of ‘if’ but ‘when.’ Those who see it coming are already preparing for it. They know that when the economy rebounds the age of 3% to 4% mortgages will be over. That’s why they’re buying or refinancing now to lock in these rates for the next 30 years. They know the rental market will remain strong for the next few years and then eventually soften. That’s why they’re acquiring rental properties to rent out now, converting as much of it into equity as possible, and making plans to sell once the purchase market is red-hot. We see individuals making this exact plan every day at Garvens Mortgage Group. It’s astounding how many people are either actively seeking rental properties to purchase, or are holding onto their old homes when purchasing a new one for the sole purpose of renting it out.
We likely have another five years of sub-standard economic performance before the economy really takes off. In 2008, many scoffed at the notion that the economy would not quickly recover. Seven years later, those scoffs have become muted. More and more people are accepting that we won’t have a fully recovered economy until 2020. Knowing this, it’s imperative to start planning for it now. The real estate market is soft and interest rates are once again near historic lows. If you accept Warren Buffet’s maxim of “buy low, sell high,” you know that now is the time to buy.