I bet back in June you heard all about the ‘Brexit’ vote. But did you hear about the key report Harvard University released about the United States at around the same time?
I’m willing to bet you didn’t.
And yet for my money it’s the Harvard report every investor should be focusing on. That’s because it was about the US real estate market. And the report painted a very positive outlook, with big implications for the US economy.
The report, State of the Nation’s Housing 2016, also backs up what we’ve been saying at Cycles, Trends and Forecasts since we launched in 2014. And that’s the fact that the US economy has plenty of room to grow — and lift subsidiary economies like Australia along with it.
The real estate market will drive the US economy
A major part of that growth will come from increased property construction and household formation. It’s happening in the US already — not to mention the ongoing drop in foreclosure rates — and will drive the American economy forward for the foreseeable future.
Historically, hard numbers back this up. The report suggests residential fixed investment accounted for 4.3% of annual US GDP in the 1980s and 1990s. It’s only been 2.8% so far this decade.
There’s plenty of demand for affordable homes in the US right now.
To give you an idea of the scale, Harvard suggests 36% of US households are renters — the largest share since the 1960s.
The vacancy rate for existing home inventories has been under six months for four years running now. Six months is considered the ‘balanced’ level.
So rents and property prices are rising.
You can consider the following to show the strength in US housing: the median price of existing homes was up 6.6% in real terms last year.
As part of that, one million homeowners were lifted out of negative equity thanks to rising home prices. The number still underwater is down from 12.1 million in 2011 to 4.3 million as of the fourth quarter of 2015.
Don’t underestimate the significance of rising house prices. CNBC suggested in July that homeowners had an increase of $260 billion in house equity in the first quarter.
Rising home equity will generate housing wealth effects, according to Harvard, and lift consumer spending and the economy.
Construction and development have a long way to go
New home sales rose 14.6% to 501,000 in 2015, while existing home sales increased 6.3% to 5.3 million.
So we’re getting the expansion in construction to meet the pent-up demand.
This demand will come from the ‘Millennial Generation’, born between 1985 and 2004.
As they move into their 20s and 30s, the Harvard report says they are expected to form well over two million new households (on average) per year to 2025. They will go from 16 million households in 2015 to 40 million by 2025.
The construction industry is scrambling to meet this demand. That’s after it lost 20% of its workforce when workers left to find other jobs during the recession.
It’s notable that the S&P 500 Homebuilders ETF [AMEX: XHB] is up 36% since it made a low in February.
There could be plenty of growth ahead.
You can see on the chart below that the US has a long way to go to get back to its former peak…
That’s not to say the property market doesn’t have some headwinds. There is still a backlog of foreclosures, and tight mortgage credit conditions are still a difficulty for the younger buyer or those with poor credit.
This is all part of the process the US economy has to work through. The positive signs are there.
In late June, The Wall Street Journal reported the percentage of Americans with subprime credit scores had fallen to the lowest level in more than a decade. It’s the sixth year-on-year decline.
For now, the Harvard report reveals the US economy is strong — and getting stronger.
If you’d like to know how to take advantage of this real estate cycle, go here.
Associate Editor, Cycles, Trends & Forecasts
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