February 22, 2019
Could Millennials, long regarded as the renting generation, represent the long-term bedrock of single-family home construction? A special report from Wells Fargo Securities and L.E.K. Consulting says yes.
“Millennials’ delayed household formation has led to a 2.2-million household gap relative to what the historical headship rate levels of their Gen X counterparts would imply,” according to the Wells/L.E.K. report.
That late start in forming households can be attributed to the weak labor market following the 2008 recession, and a student debt overhang, the report says. “However, aging Millennials are set to close the headship rate gap with prior generations—likely driving steady long-term growth in residential new construction.”
The same deep recession that weighed on demand and kept Millennials out of the housing market also kept builders and lenders from committing to new single-family construction, the report says. The result is “an undersupply of single-family homes.” Single-family housing starts are still 22% below the long-term (1980-2000) average.
However, the Wells/L.E.K. report sees the slow recovery in housing starts post-recession as a positive backdrop for the current cycle. The report notes that historically, the depth and duration of housing downturns have been heavily influenced by housing starts levels relative to the long-term average when a downturn begins.
On that score, Wells/L.E.K. analysts have good news. Citing annualized November 2018 figures, the report notes that housing starts of 1.256 million for the month were 13% below the long-term average of 1.438 million.
For housing starts to peak at this level would be unprecedented, the authors say. Since 1970, there hasn’t been a single instance of housing starts turning negative before they reached the long-term average.
“An economic recession may seem overdue, given historical trends,” says Wells Fargo Securities’ Harry Shaw. “But given our industry specific observations on supply, demand and the level of key economic indicators, we expect the impact of any slowdown on residential new construction activity to be muted.
“The outlook for residential construction in 2019 is improving versus late 2018, and there are sufficient tailwinds to carry the industry through any near-term economic turbulence,” Shaw adds.
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