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By Robert Johnson, CFA | 08-24-2016 11:00 PM

Demographics Tell Tale of Two Housing Economies

A resurgence of first-time buyers is driving new home sales, while the aging population is affecting existing home inventory and sales, says Morningstar's Bob Johnson.

Bob Johnson: This week was a tale of two housing economies. Existing home sales were modestly disappointing, growing only a little bit compared to a year ago and actually shrinking month-to-month. On the other hand, new home sales set an eight-year record at 654,000 units, which was great news. And so, we've got this new home sales market doing very well and the existing homes market stalling out, which is a trend that we've been seeing for some time.

If you look at a 12-month rolling average, new home sales are growing at about 10%. That sorts out all the monthly volatility. So, 10%, that's a pretty good number. On the other hand, existing home sales continued to slow a little bit and are running more like 3%. So, it's a very interesting phenomenon.

We love to see the new home sales do better because it's a bigger contribution to the economy when you're obviously building a new home from scratch instead of just getting remodeling and refinishing work and brokerage commissions that you get out of an existing home sale. So, we love to see the new home market do better. But what is driving that and driving the overall market?

Well, certainly, one of the things going on here is that existing homes--people are staying there longer, and we've got this dynamic now where the people that typically buy their first home in that 31- to 33-year-old range has been increasing dramatically as we come out of this birth dearth of the 1970s when births fell dramatically and affected a lot of data as much as boomers affected their few years earlier. The dearth of births in the 1970s drove a lot of housing activity the wrong way, and certainly it affected beginning in about 2006-2007 the number of 31-year-olds was on a dramatic decline.

We're now slowly building our way out of that and the number of 31-year-olds are increasing again, and we're about halfway back to what we would consider to be a normal level, which provides a very positive input to the housing market, because people typically buy that first home at 31 to 33.

On the other end of the market, the aging population, people typically move out of their homes--we've got some stagnation going on there. So they are staying in their homes. And so what's happening there is we've got this Depression-era babies, and they were very few in number and actually were declining through about 1936 or 1937 and so that's kind of been--the number of people that are that age is shrinking--that are about 81 or so--and that's keeping people in homes longer.

You put those two together and you've got a demographic that's very positive and explains why new home sales are probably doing so well and why there is a lack of inventory in existing home sales, which is one of the big impediments despite relatively low interest rates. So that demographic factor is a big deal.

Affordability now has been relatively constant over the last four or five years, and some of the gap between a new and existing home has narrowed a little bit. So that's also favored new home sales a little bit as well. The one fly in the ointment in all of this is obviously affordability and interest rates. And as interest rates move up, it could weigh on both of these markets. But for now, it's very favorable and demographics are favorable for housing, and it should help move the economy along over the next five to 10 years with the favorable demographic tailwinds.

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