April 23, 2024 – Why Are People Not Happy?

Economic Commentary

The job market has been hot. The economy has added jobs for 39 consecutive months, marking the fifth-longest period of job expansion on record. The unemployment rate has been below 4.0% for 26 months in a row, the longest streak since the late 1960s. Moving to the stock market, the S&P 500 has gained approximately 80% in the last five years. These strong economic numbers should be making the average American very happy. However, consumer confidence has not returned to the heights seen before the pandemic — though confidence is well above the pandemic era lows. Why is this the case?

The first reason we can think of is inflation. If you get a raise and rising food prices eat up your gains, you feel like you are on a treadmill. Every trip to the grocery store or the gas station is a reminder of such. Keep in mind that the “post-pandemic” inflationary surge seems to be over, but that does not mean prices are going back down. It just means they are not rising quickly anymore. Wage gains are again outpacing inflation and that means more purchasing power in the long run.

The second reason is inequality. If you own a home and/or have a healthy portfolio of stocks, you have done well over the past five years. The majority of American adults are homeowners and if you bought your home over three years ago, you have prospered. Plus, you are better protected from high interest rates and inflation. But those who rent have been hit with higher leasing rates and have no inflation protection. Therefore, over the past five years, the spread between the haves and have-nots has gotten wider. This is a major reason that the government has made it a goal to facilitate purchases by first time homebuyers. Affordability with high interest rates is an issue, but the long-term rewards are worth it. The conclusion? Lower inflation and interest rates would help make people much happier.

Weekly Interest Rate Overview

Mortgage rates continued to march upward in light of strong economic reports and inflation stabilizing at a level higher than the Fed’s target. The turmoil in the Middle East did not produce the flight to quality we would ordinarily see, which typically would have lowered interest rates. 30-year fixed rates rose to 7.10% from 6.88% the week before. In addition, 15-year loans increased to 6.39%. A year ago, 30-year fixed rates averaged 6.39%, 0.71% lower than today. Attributed to Sam Khater, Chief Economist, Freddie Mac, “The 30-year fixed-rate mortgage surpassed 7 percent for the first time this year, jumping from 6.88 percent to 7.10 percent this week. As rates trend higher, potential homebuyers are deciding whether to buy before rates rise even more or hold off in hopes of decreases later in the year. Last week, purchase applications rose modestly, but it remains unclear how many homebuyers can withstand increasing rates in the future.” Note: Rates indicated do not include fees and points and are provided for evidence of trends only. They should not be used for comparison purposes.

Real Estate News

According to the Pew Research Center, a quarter of all adults ages 25 to 34 now live in a multigenerational living situation (which it defines as a household with two or more adult generations). It’s a number that’s been creeping upward since the early ‘70s but has swung up precipitously in the last 15 years. From 2010 to 2020, there was a nearly 18 percent increase in the number of multigenerational households. The research arm of the apartment listing and resident services company RentCafe went granular on Gen Z and found that 68 percent over the age of 18 still live with a parent or parents. As for millennials, 20 percent are back with mom and/or dad (or just never left). When Pew recently surveyed people living in multigenerational homes, more of them said financial issues drove the decision to move in with family than any other reason. “Whether it’s to be able to save the money to buy a home, to be able to go back for a master’s degree or to be able to do something to further their ability as independent adults,” said Donna Butts, executive director of Generations United, a nonprofit that researches and advocates for multigenerational households. Major macro disruptions — financial or otherwise — often lead to spikes in multigenerational living: “We’ve seen the largest increases when our country has had a recession or a housing bust and then Covid,” Butts said. “But what people are surprised by is they always think that the numbers are going to decrease again.” The census found that there was a dip in younger adults living with parents after a spike at the height of the pandemic. But the dip was pretty shallow. Which means many people moved in and just never left. One more reason multigenerational housing is on the rise: America is getting less white. Hispanic and Asian people, especially if they are immigrants, are more likely to live with extended family. Black families are also traditionally more open to these arrangements. In many cultures around the world, multigenerational living — at least until marriage, and often even after — is the norm, not the exception. Source: The Mortgage Bankers Association

An average member of Generation Z will spend $145,000 on rent by their 30th birthday, RentCafe found, noting millennials spent $127,000 during that period of their lives (14% less). However, Gen Z is also projected to earn about 14% more than millennials during their 20s. Both generations will have spent roughly 27% of their income from 22-29 on rent. For members of Gen Z who own a home during their 20s, that would account for 30% of their income, compared with 36% for millennials during the same period. For Gen Z, it would cost about $165,000 to own a home during that time period. However, there’s good news for Gen Z. The gap between renting and owning will be less than it was for millennials during the same period–14% for Gen Z compared with 36% for millennials. Source: RentCafe

For a large number of millennials, the generation born between 1981 and 1996, the time to buy a home has never been quite right. Older millennials were not yet 30 when the financial crisis of 2007-2008 upended the housing market and the US economy, causing the worst downturn in the country since the Great Recession. When younger millennials came of age to buy a home, the US housing market was booming, driven by high demand and low inventory, with prices reaching heights that made properties unaffordable to many. Despite adverse economic conditions, and being tired of waiting for the perfect moment, many got on the property ladder anyway—and their late arrival has shaken up the entire housing market, according to experts. “Because of the high cost of living, millennials have had to delay marriage, they’ve had to delay having children. So, what’s going on is that there’s been a delay in household formation, though right now the rate of household formation is double the rate of population growth,” Phil Powell, executive director of Indiana University’s Business Research Center, told Newsweek. “What that means is that there is unprecedented demand for housing and that is why housing prices are going up,” he added. Millennials, said Powell, “are putting upward pressure on prices and it’s going to continue, it’s not a fad or some bubble in the housing market. This is real, it’s demographic.” Alejandra Grindal, chief economist at Ned Davis Research, told Newsweek that baby boomers (those born between 1946 and 1964) are also adding price pressure. “They are the second-largest age cohort in the U.S., and they’re also driving up demand. Compared to prior generations, baby boomers also plan on staying in their homes much longer. They don’t want to go to assisted living or nursing care. Plus, a lot of them would like to own second homes.” Waiting for a better, cheaper time to buy a home, in 2022 millennials brought up the average age of a first-time buyer to 36, according to the National Association of Realtors, from 33 in 2021. Sara Coers, a lecturer in real estate at Indiana University, said this generation waited because “they have been much more tolerant of renting, whereas previous generations were much more insistent upon homeownership,” Coers told Newsweek. “We overbuilt prior to the last recession and the capital markets, the lenders, the banks thought we didn’t really want to build new homes after that. They weren’t paying attention to the future of household formation. And we dramatically undersupplied the country.” Grindal added that millennials are also changing the profile of homeowners in the U.S., with “more single-person buyers” while it used to be more common for married couples to buy a home. Source: Newsweek