The American housing dream is shattered

CNN, CNN BUSINESS

By Allison Morrow, CNN Business

A little over a decade ago, the dominant narrative in the housing market was that Millennials simply weren’t buying. They were too cheap, lazy or itinerant to commit to something as onerous as a mortgage.

Cut to 2020 and that narrative has been turned upside down. It wasn’t that Millennials didn’t want homes in the suburbs, they just couldn’t afford them. But when the pandemic hit and demand for goods soared, the fury was fueled by people in their thirties – finally flushed after years of hard work at whatever jobs they had left in the wake of the fallout from the Great Recession, and, for many, eager to escape to the wide open spaces of suburban living.

(It also didn’t hurt that skyrocketing stocks meant baby boomer parents with large investment portfolios were happy to pass on some of those gains to their millennial darlings.)

As this 2020 housing boom begins to unravel, those who managed to close a home in the crush of competition fueled by rock-bottom mortgage rates should consider themselves extremely lucky.

Here’s the deal: A new report on Thursday showed first-time buyers made up just 26% of all homebuyers in the year ending June – a record high in the four decades the National Association of Realtors has led his investigation.

By way of historical comparison, the share of first-time buyers over the last decade has been between 30% and 40%. In 2009, in the midst of the Great Recession, it reached 50%.

In more bad news for young millennials and Gen Zers hoping to buy their first home: the typical age of a first-time home buyer is now a record high 36, up from 33 last year.

It’s not hard to see why: first-time buyers have less money saved and lack the net worth of repeat buyers.

“They have to save while paying more for rent, as well as student debt, childcare and other expenses,” said Jessica Lautz, NAR’s vice president of demographics and behavioral insights. “And this year we were facing rising house prices, while mortgage rates are also climbing.”

Oh yeah, one more thing: In addition to rising mortgage rates, house prices have also soared, with the median peaking at $413,800 in June. (Imagine your starting house coming in at 400,000!)

All of this also drives up rental prices, as potential buyers opt to continue saving (hopefully) for a down payment.

MY TWO CENTS

Housing is broken. I don’t claim to have a magic bullet, but it’s clear that outdated inventory constraints and zoning restrictions are a big part of the problem.

“Policies that regulate land use and housing production make it extremely difficult to add homes in desirable locations,” writes Jenny Schuetz, urban economist at the Brookings Institution.

The United States, she argues, hasn’t built enough homes and continues to build too many homes in the wrong places.

Rather than rebuilding in existing neighborhoods, the housing supply expanded through “sprawling single-family subdivisions on the urban periphery.” This puts more people and homes in environmentally vulnerable areas, such as western regions prone to wildfires.

As affordability reaches crisis levels, now is the time for federal and local governments to rethink how we frame the American Dream. But that will only happen if those who stand to benefit – Millennials and Gen Z – are better represented in elective office. As Schuetz argues, ruling upper-middle-class baby boomers are understandably reluctant to change the system that got them where they are.

NUMBER OF DAYS: 75

Seventy-five basis points: all the cool central banks do.

On the heels of the Fed’s fourth straight rate hike of 0.75 percentage points, the Bank of England followed suit on Thursday, raising its own key rate by the same amount – its biggest hike in 33 years. The European Central Bank did the same last week.

(Note: “basis points” is how central bankers talk about rate moves, which usually happen in small increments. One basis point = one-tenth of a percentage point.)

EMPLOYMENT WATCH

Tomorrow, when the Bureau of Labor Statistics releases its October jobs report, it will be the last major reading on the economy ahead of the midterm elections — and capping off a week of new data signaling that the labor market white-hot shows only timid signs of cooling down.

See here: The US economy is expected to have added 200,000 jobs last month, up from 263,000 in September, but well above the pre-pandemic average. The unemployment rate is expected to rise slightly, from 3.5% to 3.6%, still near a half-century low.

But – there is always a but – this is not, according to the Fed, good news. And that could be very bad news for Democrats next week.

The most aggressive monetary tightening in modern Fed history – while driving mortgage rates above 7% for the first time in 20 years, slowing business growth and reducing household spending – barely made a dent in the job market.

In normal times, this is the kind of news that deserves to be celebrated. But in the bullish economy of 2022, this is concerning, as it suggests the economy is overheating. That’s partly why the Fed announced its fourth consecutive three-quarter point hike, the latest in a series of aggressive moves that would have been unthinkable just months ago.

Another strong jobs data point will only reassure the Fed that the labor market can handle more rate hikes.

The Fed would absolutely love for everyone to keep their jobs and simply witness a “slowdown” in the labor market – a slowdown in wage growth, for example, or a drop in job openings.

But realistically, when the Fed raises rates, it (eventually) leads to lower employment.

Analysts on all sides say the odds of a recession are high, even guaranteed. But the Fed is betting that the pain of a recession (and the job losses that would come with it) is better, in the long run, than the pain of runaway prices.

Unfortunately for Democrats trying to hold onto power next week, the pain of inflation appears to outweigh any positive feelings about job security. According to a new CNN poll, three-quarters of likely voters already feel the country is in a recession.

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