Will Millennials Ever Become A Generation Of Homeowners: BofA Has A Troubling Answer

America"s biggest as of 2016 generation, the Millennials, has a heavy burden on its collective 150 million shoulders: its task is to not only step in as a buyer of stocks once the baby boomers begin selling in bulk, but to also provide the much needed support pillar for the recovery of the US housing market. In fact, there have been countless "bullish" housing market theories built upon the premise that sooner or later tens of millions of young American adults will emerge from their parents" basements, start a household, and buy a house.

So far that theory has not been validated. One simple reason is that Millennials simply can"t afford to buy a house. As we reported last week, a study from Apartment List showed that nearly 70% of young American adults, those aged 18 to 34 years old, said they have saved less than $1,000 for a down payment. This is similar to what a recent GoBanking Survey found last year, according to which 72% of "young millennials"- those between 18 and 24 years old - had $1,000 in their savings accounts and 31% have $0; a sliver (8%) have over $10,000 saved. Of the "older millennials", those between 25 and 34, 67% had less than $1,000 in their savings accounts, 33% have nothing at all, and 15% had over $10,000.

So does that mean that Millennials can simply be written off as a potential generation of homeowners, and if so, what are the implications for the broader housing market?

That"s the question BofA economist Michelle Meyer asked on Friday, although she phrased it in the proper context: "Is it [still] cool to buy a home."

To our surprise, Meyer found that while the homeownership rate among young adults has plunged to a record low, helping to explain the slow recovery in single family homebuilding, and confirming empirical observations that Millennials have largely been a "renter" generation, by Bank of America"s calculations, the Millennial generation can afford to buy a home - at least in terms of making the monthly payments. While we - and many others would dispute that - BofA does make some other interesting observations, namely that lifestyle changes, including delayed marriage and childrearing, have led to fewer homeowners and a tendency to live close to city centers. Well, if it"s not money it"s clearly something else. Let"s dig in.

First, here is BofA on a rather trivial, if critical topic: "the importance of the youth"

In order to understand the future of the housing stock, it helps to get a grasp on the growth in population, which is a function of immigration and the rate of births/deaths. The Census Bureau is projecting population growth of 0.8% annually over the next decade and 0.7%, on average, through 2036, showing continued slowing from the 0.9% average last decade. Perhaps even more important, however, is the age composition, with a particular focus on young adults who are the drivers of household formation. There are currently 75 million individuals considered to be Millennials, making up the largest generation. The average age is 27.5, implying that there is a large cohort of young adults coming to age (Chart 1). In theory, this should underpin growth in homeownership. But, it is complicated - we have to understand the ability of Millennials to afford housing and the desire to become homeowners vs. renters.

Can they afford to buy?

The first question to ask is whether the younger generation can afford to buy a home. We turn to the National Association of Realtors (NAR) affordability index which is a ratio between median family income and the qualifying income for a mortgage as a function of median existing single-family home prices and mortgage rates. According to this measure, homeownership is still very affordable relative to history. What about for young adults? Following the NAR"s methodology, we compute an affordability measure for the 25-34 year old age cohort using median household income data from the Census Bureau. Our computed index only goes to 2015 given data limitations, but we extrapolate forward (Chart 2). We find that housing is still affordable for young adults, although not to the extent it is for the overall population. The gap in affordability between the overall population and young adults has widened over the years. That said, the affordability index for young adults is still above the historical average for the aggregate, implying that housing is generally affordable.

So what seems to be the problem? One obstacle is being able to make the downpayment. The NAR measure assumes a 20% down payment, which is a high hurdle for young adults- remember that the bulk of the current 25-34 year old cohort started their careers during the financial crisis and early stages of the recovery, when the economy and labor market were fragile. Plugging in a lower down payment of 10% and the situation looks worse due to increased principal and interest payments. With a 10% downpayment, the index would be at 125.2 in 2015, which is 11% lower than the standard 25-34 year old index and 25% lower than the broad NAR index.

Another challenge is the ability to take on a mortgage loan given high student debt. According to the NY Fed"s credit panel, total outstanding student debt has reached $1.3 trillion, a substantial increase from the $260bn level in 2004. According to the NAR"s Generational Report, nearly 50% of homebuyers under the age of 36 noted that student debt delayed their home purchase, making it harder to afford the downpayment. And, of course, there is the challenge from tighter credit standards which has made it more difficult to achieve homeownership.

But do they want to buy?

Addressing whether Millennials can afford to buy is only one part of the story. We need to understand if they actually want to buy. The homeownership rate has tumbled at a faster rate for 25-34 year olds than for other generations which we do not think can be explained by affordability metrics (Chart 3). We think it also owes to lifestyle changes. Maybe there is something to the stories about Millennials preferring to spend money on avocado toast instead of their home?

The shopping cart of young adults

Using data from the Consumer Expenditure Survey, we can look at the evolution of the consumer basket over time for those aged 24-35 (Table 1). Relative to the peak of the housing bubble in 2004, there has been a decline in the share of dollars spent on owned shelter and an increase in spending on renting. It also seems that this age group is spending more on healthcare and household operations, which include services paid to keep their household running efficiently (think cleaning). This has come at the expense of spending on apparel, transportation and groceries. The young adult in 2004 has a difference shopping cart than one today.

The single life

The change in spending patterns could reflect the fact that young adults are not only less likely to be homeowners, but they are less likely to be married or even live independently. Instead, this age group is living with parents or other relatives more than in the past (Chart 4). This adjustment in living arrangements has been ongoing for years but the Great Recession seemed to have speed up the trend. Today only 55% of those aged 25-34 live with a spouse/partner compared to over 80% in 1967. Life events such as getting married or having children are typical triggers to buying a home. The longer this age group lives with parents or independently, the more homeownership will be delayed.

City slickers

We have also seen a shift toward urban centers and away from rural areas over the years. This goes hand-in-hand with a decline in homeownership for young adults. Interestingly the share of young adults living in the suburbs has been fairly steady at around 41% (Chart 5). Moreover, it appears that there is a flocking toward the major cities, specifically in the city centers which are close to transit, workplaces and restaurants. City centers typically have more rental properties than the suburbs. But we also see greater home sales close to city centers than in the past. According to BuildZoom, new home sales within 5 miles of the centers of the 10 most densely cities have exceeded 2000 levels but if you go another 10 miles out, sales are about 50% below 2000 levels.

There are both cyclical and secular forces behind the drop in the homeownership rate for young adults. While young adults can generally afford housing, there are other constraints including the ability to make a large enough downpayment and tighter credit standards. Lifestyle changes are partly to blame.

BofA" troubling conclusion: "These dynamics won"t change in the medium-term which should translate to a lower equilibrium pace for single family housing starts."

Is India The Next Pakistan? "It Keeps Getting Worse Ever Faster"

Authored by Jayant Bhandari via Acting-Man.com,

India’s Rapid Degradation

This is Part XI of a series of articles (the most recent of which is linked here) in which I have provided regular updates on what started as the demonetization of 86% of India’s currency. The story of demonetization and the ensuing developments were merely a vehicle for me to explore Indian institutions, culture and society.

The Modimobile is making the rounds amid a flower shower. [PT]

 

Tribal cultures face an inherent contradiction. They create poison from within to grow more collectivist, controlling and tyrannical — members of the populace looks for nannies, and they readily find sociopaths to exploit that need. Their lack of organizational skills, their inability to engage in economic calculation and their irrationality lead to massive internal stresses and the ultimate devolution of such an unnatural society.

India finds itself in a situation where it is grasping for more totalitarianism to solve the problems that totalitarianism created. The demonetization exercise was an assertion of India’s underlying tribal and collectivist culture.

Demonetization Pain Continues

Cashless ATMs continue to be the new normal in India. In a recent conversation, economist Professor Madhusudan Raj mentioned that as many as 70% of the ATMs in his city are still not operational. The situation in villages and small towns is much worse. Banks are often clogged with people.

Eventually most people who must have cash will get it, but businesses need easy access to large amounts of their own cash without incurring transaction costs. They continue to face horrendous problems, which are translating into closures, retrenchment of staff, and bankruptcies. The tax authorities are getting increasingly rapacious. According to Professor Madhusudan Raj:

“The tax department is busy conducting raids on old widowers, small traders and merchants like chicken-shops, shoe-shops, small restaurants, gas stations etc.; pretty much anyone who deposited more than half a million rupee in banks during the demonetization process. The department is forcing small traders to declare income under Modi’s PMGKY (Prime Minister poverty alleviation) scheme, but leaves big corrupt business tycoons untouched.”

Draconian regulations on the use of cash are increasing. Businesses are in fear of the State. Freedom of speech is rapidly receding, not only because of fear of the government, but also because Indians are becoming increasingly fanatic.

Any new cash continues to find its way to the financially powerful, leaving small businessmen and the informal sector reeling in economic trauma. The normal rhythm of the economy has been destroyed. People continue to delay discretionary purchases. The market continues to be slow.

Businesses are failing and the poorest are finding employment very difficult to come by. Food prices are still much cheaper than normal, as a result of the economic struggles of poor people. Farmers are facing huge financial pressure in turn.

It is a vicious cycle in which people who at first lacked access to their own money because of the demonetization now face a situation in which they simply don’t have any work and hence no cash.

From the Hindu newspaper: Only three out of forty-five ATMs in the IT-hub city of Hyderabad were functioning on 13 March 2017. Businesses are starving for cash.

As is the case with an irrational tribal society, many members of India’s middle class are utterly lacking in empathy for those who are suffering. Slowly but surely, universal principles assert themselves though, and economic harm is flowing toward them. Alas, they still fail to recognize the chain of causality.

The slow poison of demonetization and populist scams schemes at work: US-listed IT-major Cognizant is expected to slash more than 10,000 jobs. It has around 260,000 employees and around 75 percent of its workforce is based in India. The situation of other IT companies in India is similar. A huge wave of young, mostly unskilled, untrained and uneducated people – about 12 million –  join India’s workforce every year, but have little prospects of finding a job.

Without Reason, the Only Stable Institution is a Tribe

It has been 70 years since the British left India. In these years, Indians have systemically destroyed what the British left behind by asserting their tribal, superstitious and irrational culture.

It was believed that the separation of legislature, judiciary and executive which the British had created would stay. What was forgotten was that such institutions had evolved in Europe because of the tool of reason. Indians imported all the fruits of western civilization — technology, music, movies, Kim Kardashian, etc. — but completely failed to adopt the European concept of reason.

Without reason, India had to drift back to its tribalism. Today, Indian institutions are hollow shells of what was bequeathed by Britain. The executive, the judiciary and the legislature are indistinguishable from each other. One would find it almost impossible to come across even an educated Indian able to properly explain the difference between these three branches of government.

As Professor  Madhusudan Raj notes:

“There is a big cold war going on between the Supreme Court and the Modi government, which is trying to take full control of the courts. Modi’s parliament can now dismiss the appointment of Supreme Court judges in the name of ‘national security’.”

When the British left India, virtually all leaders had been selected and nudged into their positions by them. India was a democracy only in name. Children of these leaders and later on their children had political power.

Jawaharlal Nehru was India’s first Prime Minister. Then it was his daughter’s turn, Indira Gandhi. And then it was the turn of her son Rajiv Gandhi. And then Rajiv’s wife, Sonia Gandhi took over (she ruled using a puppet, Manmohan Singh).

The last vestiges of whatever class Indian politics might have had ended along with the end of Sonia Gandhi’s rule three years ago, and the subsequent inauguration of Narendra Modi.  Now raw tribalism is in full force in India.

It is not only India that is affected.  European institutions have failed and mutated into entities catering to underlying tribalism in nearly every country in Africa, the Middle East, South Asia and most of Latin America. The nation state, a European institution, is too unnatural for these societies.

India seemed like an exception to the international media. This is because the smartest people of India moved to the US and Indian lobbies leveraged this fact to make India look good – despite the fact that India’s per capita GDP of $1,718 is worse than that of most well-recognized banana republics.

There has indeed been one good thing about India though: freedom of speech survived among a minority. This happened not because of any inherent goodness, but because India is an extremely diverse place, perhaps the most unnatural country.

The infighting and stresses it generated have failed to given Indians a collective identity. This cirfcumstance allowed a minority to speak its mind. Alas, even that is now coming to an end. Hindu nationalism, a.k.a. Hindutava, is rapidly weaving Indians into a tribal collective.

But the Media and the World Bank are in Awe

The international media and the World Bank, find inspiration in what is happening in India. India has recently released a GDP growth figure of 7%. India’s new identity card scheme, Aadhaar, is believed to be a massive success, so much so that the World Bank is urging the world to copy it.

The Indian stock market has risen nicely over the last few weeks. So has the Indian rupee. Moreover, Narendra Modi’s party has just celebrated massive victories in recently held provincial elections. What is not to like about India?

“The Aadhaar system is the most sophisticated identification program in the world,” says World Bank economist Paul Romer [100 crore = 1 billion] – click to enlarge.

In my last update, I explained why the 7% growth figure is a mere paper figure not reflected by reality on the ground. India’s economy very likely suffered huge negative growth last quarter. An increase in revenues was only experienced by politicians and bureaucrats, who collected larger bribes than ever. The common man no longer has the courage to haggle over bribes these days. He pays whatever he is asked to pay.

Ironically, Modi gave the common man and particularly so-called educated people in India huge hopes, and not unlike people in North Korea, they are increasingly nationalistic and proud.  93% of the population have indeed signed up for the Aadhaar ID. It is not compulsory to have one, but the Indian government has made it impossible not to have one. People who don’t have these cards are simply opening themselves up to getting exploited in new ways.

It is worth visiting banks when so-called pensions — paltry sums of a few dollars — are coming due for the old and infirm. They grovel and sit for hours outside bank branches, consistently humiliated by everyone, from guards to managers. In this electronic age their pension often goes missing. Then they must run from pillar to post to get what they have been promised.

India’s GDP per capita is $1,718, making it poorer than Africa. You can enforce a perfect tax regime or a perfect ID system (neither of which is actually possible) on such a chaotic society, but you have to have productivity to make use of increased taxes and a better ID system. Indians are mostly unskilled, uneducated, and untrained, in short, largely unfit for the modern economy.

Any rational ruler would have focused on creating competence among Indians, without which any hopes connected to increased taxation will fail. Moreover, the situation can easily become a major humanitarian crisis in the coming age of robots.

Many people will lose their ID cards soon — as perhaps more than 80% of Indians do not live in proper housing. They lack safe storage to preserve such cards. Moreover, only about 10% to 15% of the population are “benefiting” (by getting subsidized food, gas, etc.) from the cards. Could it be that most of these beneficiaries are members of the middle class?

Sensex index, daily. If you wonder why stock markets are not considered good yardsticks of economic performance, ponder the IBC General Index in Caracas for a moment, in local currency terms the best performing stock market in the world over the past 15 years. It is actually close to a record high, similar to the Sensex.  Venezuela’s economy is doing so well, that hungry people are hunting for rats in the streets of Caracas. [PT] – click to enlarge.

India’s stock market has gone up nicely over the last quarter. The stock market is not necessarily a yardstick measuring the performance of the economy. In fact, it often goes up when long-term returns from economic activity are expected to fall. The Indian government has forced Indians to move their money from the informal sector to the formal, in order to help their corporate cronies and increase tax collection.

Alas, India’s growth is generated by its informal sector. Modi has seriously harmed this sector through the demonetization exercise. Eventually, the formal sector, which has been sitting comfortably while it was subsidized by the informal sector, will suffer as well. Twelve million people who join the workforce every year face a horrendous future in a country where failing to find a job is routine.  Indian demographics are a massive liability. And crime is increasing.

It Keeps Getting Worse Ever Faster

I would not have written any more updates on the demonetization crisis, for a lot has already been said. But recently Modi’s party won elections in the province of Uttar Pradesh (UP).  UP is the most populous province of India with 200 million inhabitants, and it has historically decided who comes to power in the federal government. It has per capita GDP of $730, fairly close to that of Afghanistan.

Professor Madhusudan Raj asserts that Modi’s BJP won primarily due to the anti-incumbency vote. If anti-incumbency stays in fashion, Modi might be in trouble in two years time when the next federal elections come. What might he do to avoid the inevitable? In caste- and class-ridden, backward and illiterate UP, demagogy is much more important than economic growth plans.

Would you buy a used car from this Yogi brother? Neither would we. [PT]

Modi has appointed Yogi Adityanath as the Chief Minister (CM) of UP. Adityanath has “given up worldly affairs” to be a “sanyasi”. What distinguishes Adityanath is his extreme hatred towards Muslims. He has exhorted Hindu men to convert 100 Muslim girls to Hinduism for each Hindu who converts to Islam.

He wants to make India a pure Hindu nation. Several years ago he started a religious association, Hindu Yuva Vahini, an organization mainly playing host to a criminally-minded unemployed rabble.

Yogi Adityanath asks for unity among Hindus and a religious war

Yogi Adityanath suggests killing 100 Muslims for each Hindu killed [a really nice guy – PT]

With the appointment of Yogi Adityanath as the CM of UP, talk about development is off the table. The issue is now how to make India a non-secular, Hindu nation.

Conclusion – Maybe Give that Wall a Chance…

India’s rapid descent continues. It is hard to dispute that India is well on its way to be the next Pakistan. Or perhaps India is already worse in some ways:

As difficult as it may be to believe – Pakistan’s adult citizens are actually wealthier than their Indian brethren – and the gap is widening [PT] – click to enlarge.

One of the largest illegal migrant groups in the US is from India. In this modern era, India’s crisis will not stay limited to India. As is the case with those from other eastern religions and societies, once they arrive, Indians vote to mirror what they left behind in their home country, often unknowingly — as the virus of totalitarianism is deeply ingrained in the culture of irrationality.

A wall might not be the answer, but Trump isn’t all that wrong.

Another Modimobile  – #MIGA? [PT]