As Yogi Berra once said, “The future ain’t what it used to be,” which is an apt description of the current and future state of residential real estate in the U.S. In 2014, the post-crisis economic expansion celebrated its fifth birthday and the main economic drivers of demand, such as consumption and capital investments, experienced steady improvement. Employment grew at an average of 2.0 percent on a year-over-year basis for the three months ending in November 2014, the strongest rate since the three months ending in March 2006, which was the peak employment growth of the last economic expansion.
Perhaps the most important economic trend though, is that employment growth for millennials began to markedly improve in 2014. Most notably, the 25 – 29 year-old segment experienced a 3.0 percent improvement in employment growth, which is one percentage point higher than the overall employment growth rate. While part of the improvement is the demographic transition of Millennials as they age, it is still very good news, because this age cohort is the key first-time homebuyer segment. Moreover, younger households exhibit more mobility and higher marginal tendencies to consume from income, so stronger employment growth should manifest itself in higher spending.
The economic fundamentals in early-to-mid 2014 became stronger as oil prices began to slide. Oil prices are currently down about 45 percent since June, and this downdraft provides even more economic growth tailwind heading into 2015. Households in the U.S. spend more than $1,800 on energy-related costs annually and 22 percent of that energy consumption is due to residential real estate. So while the drop in oil prices has typically been linked to a reduction in driving-related expenses, it clearly also reduces energy-related expenses for residential real estate.
The improving economic backdrop helped the housing market withstand the modestly higher-rate environment in the early part of 2014, especially given continued rapid home price appreciation. In December, mortgage rates dipped below 3.9 percent for the first time since May 2013, when rates spiked and led to a slowdown in sales in the second half of 2013 and first half of 2014. While rates are still very low, home prices are not. It is clear that the low-rate environment has benefited home prices, as price-to-income and price-to-rent ratios are high. This indicates home price growth going forward will be fairly muted.