Something to Consider While Planning for 2015

January is a perfect time to reflect on the past year and use that knowledge to plan for the coming year.  
And what a year 2014 was. Interest rates remained at historic lows, equity markets continue their march upward, inflation is non-existent and consumers have returned to their traditional role in economic activity.

 
This is all good, so why can’t our national and local housing market get out of second gear?
Some well-known economists believe that if we could only get a housing recovery going we could add 2 percent to the Gross Domestic Product (GDP). A 4.5 percent to 5 percent GDP would signal to the world that the U.S. economy is back; the workforce participation rate would rise, unemployment would continue to fall and the Federal Reserve could return to a more “normal” interest rate policy.
Let’s examine what might be going on.  
The first place to look is to our next generation of homebuyers, the Millennial Generation. Millennials were born between 1980 and 2000 and followed those Generation X’ers who were affectionately referred to as “Generation me." As of 2012, there were over 80 million millennials milling about the United States,  so needless to say they are having an impact.
Millennials are the most diverse population group in the history of our nation, which, by itself would suggest that they might behave differently than prior generations.  
This diversity, combined with the fact that most of them came of age during the Great Recession, which started in late 2007, has produced a much different mindset for this generation.  
Think about some of the life lessons they learned: 1. Don’t trust banks; 2. You can do all the “right” things and lose your job and your home; 3. College may be more a ticket to debt than a job.  
Consider now that this population group makes up 30 percent of our total population and is the economic engine driving housing markets today.
Notwithstanding historically low mortgage interest rates and one of the most affordable residential homeownership markets since the records have been kept, millennials are choosing renting over owning.  
Economists are calling this “new urbanism” because young Americans are moving from the suburbs to our cities and delaying all the trigger events that lead to the first-time home purchase. They are single, focused on their careers, avoid debt and want the freedom to move from city to city and job to job.
So as we plan for the year ahead in Hilton Head Island, hy should we care?  
We are a community that tends to be older than the nation as a whole and relies on second homes and retirement living as the source of real estate sales.  
But Hilton Head also relies on “feeder” markets, mostly in the Northeast and Midwest, to provide a continuous source of new local homebuyers.  
Here's the rub: As folks in our feeder markets consider retirement, they need to feel confident that they can sell their home at a price that will enable them to live comfortably on Hilton Head Island.
First-time homebuyers, who normally make up 42 percent of home purchase transactions, today only account for 26 percent of those sales.  
According to a Fannie Mae survey of potential homebuyers, millennials still aspire to become homebuyers at the traditional rate of 85 percent, but they intend to make that purchase in their early 30s instead of mid 20s as has been traditional. This suggests that we may well continue in this “housing funk” for the foreseeable future.
So as we plan for 2015 and beyond we might consider staying in our current homes and taking care of some deferred maintenance.  
With low interest rates now is the perfect time to tap the home equity piggy bank and make those needed improvements to make it through to our next housing boom, which now looks like it may be a ways off.

Elihu Spencer is a local amateur economist with a long business history in global finance. His life’s work has been centered on understanding credit cycles and their impact on local economies. The information contained in this article has been obtained from sources considered reliable but the accuracy cannot be guaranteed.