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By New_Deal_democrat December 20, 2017 8:58 am
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The housing slowdown of 2017 is over; quantifying the demographic tailwind

As I noted last weekend, as is so often the case housing is frequently the decisive element among the long leading indicators, and particularly so when moneys supply and bond yields are giving us such conflicting signals.

Yesterday's report on housing permits and starts put that to rest, as for the second month, permits were higher than at any previous time during this expansion, as did the three month average of starts:

and single family permits made another new high:

Interestingly, the surge in housing is not occurring so much in the hurricane-ravaged South, but rather in the West:

There is no single state, e.g., California, which is responsible for this surge.  Below is the comparison of the first ten months of 2016 with the first ten months of 2017 in all of the western states:

Since this is the first month in which YoY interest rates are approximately equal, it makes sense that housing would be starting to improve, as shown in the graph below: 

But this is more than can be explained simply via interest rates.  As I've noted many times, a secondary force in housing is demographics. Specifically, the large Millennial generation which began with births in roughly 1980, is now all into young adulthood and in prime house-buying age.

How big a demographic tailwind is the coming of age of this large generation?  Well, if we take the graph above including interest rates, and subtract 0.5% (actually, 5% since permits are divided by 10 for scale), we get a much better fit with interest rates over the last 7 years:

Here are two more graphs which help quantify the Millennial demographic tailwind. FRED doesn't break down population by decades, but it does break down total employment by demographic decades.  The first graph below compares the employment level for men ages 25-34 with men + women in the same age group, showing the big influx of women into the workforce from the 1960s through 1980s, and that the two levels have been comparable since:

The second graph compares the overall employment level for men with the employment level for men ages 25-34:

This clearly shows a surge in the employment in this prime house-buying age demographic, so much so that it more than equals the total improvement for all demographics since the bottom of the Great Recession.

It looks like it would take a sustained increase in mortgage rates more like 1.5% YoY to cause a significant actual downturn in housing that would be consistent with a recession in the past.

In the meantime, current interest rates + demographics strongly indicates the 2017 housing slowdown is over, and housing should increase in the first six months of 2018.


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