Builder confidence in the market for new, single family homes jumped six points in March to an index, level of 71, the highest reading since June 2005, the National Associations of Home Builders
Has Anything Changed in 35 Years?
The mention of the year 1981 brings back memories of movies like Raiders of the Lost Ark and Arthur, TV fare like Hill St. Blues and Dynasty and hit songs like “Bette Davis Eyes” (remember scratchy- voiced Kim Carnes?) and “Endless Love”, belted out by Lionel Richie and Diana Ross.
A milestone is the reason for this Eighties nostalgia: The 35th anniversary of Profile of Home Buyers and Sellers, published by the National Association of Realtors (NAR).
People who can remember the real estate market in 1981 may shake their heads at how much has changed in U.S. housing and the few things that have remained surprisingly unchanged.
What Did We Do Before the Web?
After a decade of record-low interest rates, it may be hard for younger people to remember when interest rates were in the double digits. (The economy was still struggling with the inflation of the Jimmy Carter era.)
And it would have been hard to imagine, back in 1981, the current importance of the Internet as a marketing tool for Realtors. The Web didn’t exist 35 years ago, and the personal computer was still a luxury item owned by few.
“When the Profile of Home Buyers and Sellers made its debut in 1981, consumers and Realtors navigated a much different real estate landscape,” says Debbie Gilson, president of the St. Lawrence County Board of Realtors in New York State.
Some Buying Patterns Little Changed
Yet some patterns in American home buying have remained somewhat constant. In the beginning of the Eighties, for example, married couples purchased nearly three out of four of all homes. Last year, couples bought 66% of all homes, or about two out of three.
Another thing that hasn’t changed is the high correspondence between home ownership and child rearing; 63% of all home-buying couples have young children living at home.
Additionally, in both past and present, first-time buyers have been the largest segment in the home buying market. Back in the early 80s, first-timers bought 44% of all homes, new and old.
Although that market share fell to 35% in 2016, first-timers were still the biggest demographic of buyers. (The longtime average is 40%, according to NAR.)
Home Buying Habits of Singles Has Varied
In contrast, the home-buying behavior of singles has shown some market fluctuation over the years. In far-off ‘81, single women bought only 11% of homes. Their buying power peaked in the 2005-2010 period, when those same women were 21% of all buyers; last year, unmarried females bought only 14% of all homes.
Meanwhile, the percentage of single male home buyers hasn’t varied as widely as their female counterparts. Single men bought 10% of all homes in 1981, reaching their biggest market share in 2010 with 12%. The 35-year low point came last year, when single males bought only 7% of all homes.
Shrinking Down Payments
The biggest difference between home buying in 1981 and 2017 is the size of the down payment, in relation to the purchase price, according to the Profile. (NAR first began collecting data about down payments in 1989.) In that year, the typical first-time buyer put 10% down, while repeat buyers put 23% down on their purchases.
In more recent years, those down payment levels fell sharply, with first-time buyers typically paying as little as 2% in the pre-crash years of 2005 and ‘06. In the past four years, however, first-time buyers paid 6% while repeat buyers put down 13-14%.
Most economists predict that the volume of first-time buyers will continue to grow. One reason for this prediction is that first-timers are earning more. Last year, first-time home buyers reported a median income of $72,000 (up from $69,400 in 2015). Repeat buyers had income of $98,000 last year vs. $98,700 in 2015.
Do Rising Incomes Force Out Some Buyers?
What impact do rising incomes have on home prices? According to the Profile, a more affluent set of buyers may encourage lenders to be stricter, and may also bring about higher home prices. Both those trends tend to force lower-income buyers out of the home market.
The scarcity of homes for sale, either new or existing, was probably a bigger factor in keeping lower-income buyers out of the market, however. Low levels of home-building activity last year led to a drop in the purchase of new residences; in 2016, new homes were 14% of the market vs. 16% in the previous four years.
Last year’s sales figures for new homes, in fact, were the lowest recorded since the Profile started; in 1981, when new home purchases represented 18% of the home market. The new-home market segment peaked in 1989, when 29% of all homes sold that year were newly built.
What Hasn’t Changed Since 1981?
The popularity of the single-family home is one enduring aspect of the American home market. At least, that was true of married home buyers. Singles, on the other hand, were the most likely to opt for a town-home or row house.
Consumer preferences for suburban or master-planned communities is another factor that has remained steady over the years, although urban neighborhoods have enjoyed growing popularity among some buyers.
One aspect of home sales that has changed surprisingly little is both the size and price of the American starter home (once the numbers are adjusted for inflation, of course.) In 1981, the typical buyer purchased a 1,700-square – foot home costing $70,000, or $201,376 in inflation-adjusted dollars.
In the 2016 survey, purchased homes were typically 1,650 square fetal most identical to the Reagan-era starter home — and cost $182,500.
Buyers expect to live in their current homes for 12 years. As homeowners age, not surprisingly, they tend to live in their homes for longer periods; repeat buyers also tend to be long-term owners.
What makes people move? According to the Profile, the biggest factors are “life changes,” notably marriage, new additions to the family, children moving out—and—retirement. Overall, just over one in four owners (26%) said life changes would make them buy another home.
BUFFETT SAYS BUY
What does self-made billionaire Warren Buffett say? His advice is to buy. Real estate is an asset “for a great many people,” particularly for families that plan on being in the same location for many years:… One of the reasons a home is a terrific buy is because of the 30-year mortgage.. ..[It’s] “the best instrument in the world,” Buffett says. “Because if you’re wrong and rates go up to 2% [higher], which I don’t think they will, you pay it off. It’s a one-way renegotiation. It is an incredibly attractive instrument for the homeowner and you’ve got a one-way bet.” — CNBC
Home Buying and the Life Cycle
Another stable feature of the American housing market is the way that one’s age influences buying choices. The Profile divides home buyers into five generational groups, starting with Millennials, with an average age of 31, followed by Generation X (average 40), Younger Boomers (56), Older Boomers (65) and the Silent Generation (80).
Here are some highlights of the Profile’s generational findings:
- Millennial remain the most active age group of home buyers. In 1981, they represented 44% of the market, peaking in 1989 at 50%.
- Millennial are “growing up, and while [they age] they become more traditional in their buying habits,” writes Profile author Jessica Lautz. “This year’s report saw an increased share of those who purchased in suburban locations and who purchased detached single family homes.”
- Generation X was the second most active buyer group, with 26% of the market. Buyers between 36 and 50 were the most likely to also own one or more investment properties (13%).
- Generation X was the top-earning age group, with median household income of $104,700, followed by the Younger Boomers with $100,200. Those “whipper-snappers” are followed by the Older Boomers with $81,000. The youngest group reported $77,000 in income, higher only than the Silent Generation retirees with $67,000.
- Among home sellers, Gen X is the largest generation of sellers at 25%, followed closely by Older Boomers at 24%. Consistent with earlier editions of the Profile, Millennial and Gen X tend to trade up to a larger and more expensive home. Younger Boomers stay at similarly priced and sized homes, while Older Boomers and the Silent Generation are often downsizing to smaller and lower priced homes.
- Younger Boomers have higher median household incomes and are more likely to have children under the age of 18 in their home.
- Younger Boomers are also more likely to buy a multigenerational home. “As the sandwich generation, they are nearly equally likely to buy this type of home for both children over 18 living at home and caretaking for aging parents. Younger Boomers buy for an array of reasons such as a job-relocation, desire for a smaller home, and change in their family situation,” Lautz writes.
- Older Boomers, between ages 61 and 70, are “often moving due to retirement, desire to be closer to friends and family, and desire for a smaller home,” according to Lautz. “Older Boomers typically move the longest distance compared to all other buyers at a median of 34 miles. Older Boomers also project the length of time they will live in their home is the longest at 20 years.”
- For buyers between 70 and 90 (the Silent Generation) the primary reasons to purchase are the same: “the desire to be closer to friends and family, the desire for a smaller home, and for retirement,” she writes.
- Unsurprisingly, the Silent Generation is the least of all age groups likely to buy a detached, single-family home; 30% of buyers in this group buy senior- related housing. “They tend to purchase the newest homes and are least likely to make compromises,” writes Lautz.
BIG GROWTH FOR SINGLE-FAMILY HOMES
Single-family home (SFH) construction started the year on solid footing…. Single-family starts (in January), however, posted a slight monthly increase, rising 1.9% to a seasonally adjusted annual rate of 823,000. Multifamily construction was the reason for the drop in total starts, with ground broken on new projects down 7%. Despite the supply challenges faced by home builders, we expect total housings farts to increase 6.7% this year. The need for inventory should underpin SFH construction. We are forecasting starts in this category to grow 10.4% in 2017. – Kiplinger’s
CEOS FEEL LIKE HIRING
“A new Business Roundtable survey of CEO projections for hiring, investments and sales growth over the next six months jumped by the most since the fourth quarter of 2009. While business leaders were planning to cut jobs as recently as the middle of last year, 41% of the CEOs polled now say they expect to ramp up hiring. The employment index of the survey, which took place between February 8 and March 1, is now at the highest level in nearly three years…Of course, it remains to be seen how much of this CEO confidence will translate to actual job creation.”- Matt Egan, CNN
Still Feeling Nostalgic?
So, some things have changed a lot since 1981, and other things not so much.
It’s arguable that today’s buyers are better off, especially at a time when interest rates are still low, incomes are rising and home builders are predicting a bumper crop of new single-family homes.
Another thing that has only grown stronger with the passing years is the high approval rate that American home buyers have for Realtors: “All generations of buyers continue to consult a real estate agent or broker to help them buy and sell their home. Buyers need the help of a real estate professional to help them find the right home, negotiate terms of sale, and help with price negotiations.
Sellers, as well, turn to professionals to help market their home to potential buyers, sell within a specific time frame, and price their home competitively.”
In NAR’s 2016 survey, nearly 90% of respondents hired a Realtor to either buy or sell a home, or both. On the flip side of the coin, the level of for-sale-by- owner [FSBO] has fallen to 8%, the lowest market share ever. Perhaps there’s a message here.
As for those still feeling nostalgic, keep in mind: In 1981, we had to watch TV one episode at a time. It would be decades before TV viewers could download an entire season of Mash or The Love Connection, and binge-watch an entire year of episodes with a single bowl of popcorn. Some changes are good!