The US housing market was the original cause of the current financial crisis. It has gone quiet recently, but this does not mean that the problems are resolved. Quite the opposite, in fact.
True, foreclosures have slowed recently, due to legal issues. This is helping to boost consumer spending temporarily, as people stop paying their mortgage whilst they wait to be evicted. But there are still 14 million homes at risk, once the system starts working again. And prices have already begun to fall again.
Equally, the Federal Housing Agency has taken over the business of making risky loans, to help support the market. But according to Barrons, the US investment magazine, 18% of its loans are now missing one or more payments. And it only has $1.2bn of capital supporting $1tn of loan guarantees, so its finances look risky, to say the least.
The chart above shows the impact on housing starts (blue line) and on permits to build new houses (red), since records began in 1959. Quite clearly, the past 3 years have marked a completely different period:
• 2011 starts were just 607k, and permits 612k
• They were never before lower than 939k even in 1975
The issue is that the ageing of the BabyBoomers means that the rate of household formation has reversed. There are fewer young people in the Wealth Creator 25-54 age group to need new homes. And high youth unemployment means they cannot usually afford them.
So the new trend, as we describe in chapter 8 of ‘Boom, Gloom and the New Normal’, is for families to move back in together. 51% of Americans (17%) are now living in homes with two adult generations, up from 42 million in 2000:
• The ‘parent’ adults are worried about future medical bills, so don’t want to spend money on a home when prices are still falling
• The adult ‘children’ often have both parents working, so want to avoid the cost of childminders
• There is also a Shared Value aspect to the arrangements, as the grandparents have someone to look after them if they become ill, whilst they can monitor the children’s behaviour when the parents are working
Encouragingly as well, Lennar, the 3rd largest US housebuilder, has picked up on this trend. They are now marketing ‘Next Gen’ homes in 40 communities, under the slogan ‘the home within a home’.
These homes are not the traditional ‘granny flat’ where granny lives once her husband has died. They have separate cooking areas, and allow both sets of adults to be independent within the shared accommodation.
This is the New Normal in action. It is different from the 1982-2007 SuperCycle, and is not easy to navigate. But it provides excellent opportunities for those who are prepared to take the time and trouble to understand what is happening.