Demand And Millennials
Demand for housing in Bridgewater is extremely high as we go into the early fall market. Active listings totaled 271 last month, down from 283 in June. At the same time July saw 80 homes sold, up from 69 homes in June. What this means is that the monthly supply of homes has decreased again from the month and year prior. July had a 2.39 months supply, down from 2.69 in June and 3.21 from July in 2017. So for sellers in this market, all good news as competition for the available inventory of homes should continue to be strong.
But what about demand in the longer term. After all we do have continuing upward pressure on pricing and rising interest rates. The question therefore is will affordability become an issue and slow down the market? And where will new buyers come from, especially in the starter home market which is the foundation of overall demand.
Welcome the Millennials. This group is poised to enter the market and carry the torch of future demand. For a number of reasons including lifestyles, student debt, and employment opportunities, this segment of the population has been on the sidelines of home ownership. But that is changing.
Time catches up with everyone. Millennials are getting older. Prior generations married earlier and had children earlier. Not so with Millennials. But now entering their 30’s, they are marrying, thinking of a family and facing financial decisions including home ownership. And research shows that the chances of someone buying a house increases by 25% if married and beginning family life. So, as this generation continues to age, they are going to jump into homeownership more.
But there are arguments as to their ability to enter. And it centers around affordability. First is price affordability. Housing has increased dramatically the past few years. But so has income. Looking at the median price of a home (left chart; yellow line), the median price and buying power was somewhat parallel until the recession hit. Prices dipped but income continued to rise (blue line). As the chart shows (Courtesy of First American and NAR), with income rising and interest rates falling, housing is actually more affordable than in prior years.
The second is rising interest rates, or mortgage affordability, and its effect on first time buyers. Historically, from 1985 to 2000, about 21% of income was dedicated to a mortgage payment (right chart: Courtesy of Zillow). During the boom in 2006, that percentage increased to 25.4%. Even though housing prices have rebounded from 2006, lower interest rates and increases in annual income have more than compensated. Currently, only 17.1% of income is dedicated to mortgage payments; far below historic numbers.
How about rising interest rates and what could happen? Predictions are for interest rates to rise to 5% as we enter 2019. But what if they do go higher, to 6% or even 7%. And research suggests that as interest rates approach 6%, buyers may pull back. But according to Zillow, at 5%, 19.0% of income would be dedicated to mortgage payments. And at 6% and 7%, mortgage payments consume 21.2% and 23.5 % of income. And no one is predicting 7% interest rates.
So, even with home prices and interest rates rising, demand for starter homes and its effect on upwards mobility, should continue to have a positive impact on the housing market for the foreseeable future.
Al Fross is a Coldwell Banker Residential Brokerage Sales Associate based in the Bedminster/Bridgewater office. Al has lived in the Bradley Gardens section of Bridgewater since 1993 and has been an active volunteer in many recreational and community organizations including serving as a current member of Bridgewater’s Board of Adjustment and as past Chairman of the Township’s Planning Board. His knowledge of the Bridgewater and surrounding areas makes him the perfect “partner” when selling your existing property or buying your new home.