Ask anyone what the number one indicator of the economy is, and most will say the housing market.
This isn’t new, of course, and dates all the way back to the Industrial Revolution and to post World War II rebuilding. Fast-forward to the explosive growth in the late 1980’s through 2006, and it’s clear the housing market has been the lead dog driving the sled.
While home ownership continues to be a driving indicator of our collective economic health, business owners and investors should be aware of other factors that are worth watching. Here are three new dogs that I believe are now driving the sled and changing the business paradigm.
- The rental market. Rents are increasing dramatically, as more and more people simplify, reject home ownership, and recover from a battering six years. Inventory of existing homes is at historically low levels. In the U.S., existing home sales are up 2.4 percent for September 2014 (source: National Association of Realtors), while Portland metro sales dropped 1.4 percent in August 2014. Compare that to a healthy real estate market, which should grow at a greater pace than inflation of 2.9 percent. (source: Regional Multiple Listing Service) Consumers are nervous about the future — their jobs, health care, debt, or fear of being trapped in a long-term commitment. They don’t want to be over extended with either cost or risk. Renting serves up more options with short-term commitments and no loss exposure as in buying in a volatile real estate market. Right now, renting is simply more affordable and flexible.
- Access to credit. The largest pool of credit-challenged borrowers in my lifetime, are now starting to get back on their feet. But it is a lot tougher to get a loan. Short sales, bankruptcy and foreclosures are commonplace, creating a barrier in qualifying for a mortgage loan. But good news is coming! The Obama Administration has been pushing for an upgrade in some FICO scores, and the positive results are starting to emerge. For instance, some credit FICO scores are now being adjusted up by as much as 25 points for borrowers that have had medical-only credit challenges. Additionally, credit score requirements have been lowered below 600 for most FHA loans, and now non-QM loans are available for borrowers who had to opt for a short sale. Only in some cases do people have to wait two years before they can purchase a home. Going forward, the market needs to adjust to friendly terms, and programs that convince the already skittish consumer to start buying goods and services again. (You’re seeing that with inducements like “no interest” offers and air miles.) The credit vault will need to continue broadening to see the economy really take off.
- Historic shift in demographics. What effect is the aging of the Baby Boomer generation having on the economy? Baby Boomers are between 50 and 66 years old today and triggering several real estate trends. The era of the large family home is fading, as more borrowers in this age group down-size and simplify. Accessory Dwelling Units and add-ons are growing. Millennials are looking for less space, lower cost and less risk, after witnessing the fallout of 2008. Many are moving back home with good ol’ Mom and Dad.The aging Baby Boomer generation is here, growing and wants services to fit their needs.
Smart businesses are poised to take advantage of these changes, by remembering that the American Dream, rather than being forgotten, is simply changing. The vast majority of Americans are replacing a white picket fence, two cars in the driveway and two children for low-risk, simplicity and flexibility with their housing, goods and services. Meeting those demands will drive a healthier economy.