Lead Story… CNBC posted a Bankrate.com study this week which found that more Americans prefer cash to stocks or real estate as a means of investment for money they don’t need for 10 years or more. In other words, a somewhat shocking 54 million American’s are embracing a zero-risk, zero return mentality. The most troubling finding was this (highlights are mine):
Younger millennials, or those at ages 18 to 25, overwhelmingly chose cash as their preferred investment for they money they would not need for at least 10 years. That was by more than a 2-to-1 margin over the next highest category, real estate. (Millennials are also less likely to own a home because they simply can’t afford one, according to a separate report from the U.K.’s office of National Statistics.)
Older generations were more likely to cite real estate as their top choice for a long-term investment.
What I find so disturbing is that the typical investment paradigm has been turned on it’s head – normally, young people in an asset growth stage should be investing long term assets more aggressively and becoming less aggressive as they age into a wealth preservation stage of life. When people, young or old start holding long term investable assets in cash, it’s deflationary. This level of risk aversion is also frequently a characteristic of those who have experienced a dramatic financial crisis like the Great Recession or Great Depression. I wrote about this back in April as it pertained to Millennials not buying homes due to experiences during the housing crash. However, the bank rate study shows that the risk averse, deflationary mentality extends far beyond the housing sector when it comes to young people and investing. This brings us to an article by Conor Sen, one of Bloomber View’s excellent new columnists that makes an interesting argument about Millennials and housing. Sen makes a case that Millennials almost need a housing bubble to come off the sidelines and create demand for new housing, using oil production as an analogy:
To understand the slow-motion trends in single-family housing, start by looking at the oil market: It took years of oil priced around $100 a barrel to spur the investments that drove higher production, leading to the current supply-driven glut and prices closer to $50 a barrel. The levers of supply and demand worked, but they worked slowly — as is happening in the housing market.
Every year since 2009 we’ve been running a housing deficit: More housing for sale has been absorbed than built. With a glut of housing left over from the housing bubble and the great recession, it’s logical that construction of new supply was subdued for a few years. But vacant inventory for sale normalized in 2012, and currently stands at a 12-year low. So why aren’t builders building more? The pace of construction remains far below the rate of household creation.
IMO, it’s an imperfect analogy as it’s likely a bit easier to drill for oil in barren portions of North Dakota or West Texas than it would be to build a large development with reasonably priced homes (the reasonably priced part is key) in places that they are needed like San Francisco or Los Angeles where discretionary entitlements, environmental regulations and NIMBY activists could tie approvals up for a decade or more. That being said, a lot of Sen’s thesis is based around economic stagnation due to the lack of wage growth in the construction industry despite a near-record-low unemployment rate coupled with incredibly low housing inventory:
In response to a nearly generational low in housing inventory and construction worker shortage, one might expect that there would be booming wage growth for construction workers, drawing labor away from other industries. Yet we don’t have conclusive signs of that. Year-over-year wage growth for construction workers is currently 2.7 percent, nearly a full point lower than it was at the same time in the year 2000.
The lack of growth in new construction jobs is sobering. Despite a need for more housing, and despite the labor shortage and the wage growth, construction industry employment fell 6,000 in April and 16,000 in May and showed no growth in June. This is the first time in more than five years that construction employment has shown no growth for three months.
This is all the more perplexing because the cyclical conditions for real estate have rarely been better. In addition to the low level of inventory and rising secular demand as millennials are ready to buy homes, the economy has rising wage growth and historically low levels of interest rates, as I wrote about last week.
Sen concludes that it might take substantial increase in both housing prices and construction wage growth in order to push housing starts to a level where construction adds substantially to GDP and adds enough supply to eventually meet the marketplace demand. It’s an interesting thought but I doubt that it’s possible (or even desirable) under in our current situation for a few reasons:
- The construction needs to take place where it is actually needed and that is more restricted by zoning and local opposition than it is by a labor shortage. In the oil market, it matters little where the oil comes from so long as there is a way to get it to a refinery and then the end user. In housing, location is everything. Unless real demand shifts into outlying suburbs, this will continue to be a problem.
- In order to work, substantial credit expansion both to develop/build units and also for purchase mortgages would be needed. This seems unlikely given current economic conditions, political climate (anti-GSE sentiment) and diminishing affordability.
- As seen in the oil industry, there is a fine line between adding enough supply and creating a glut. When oil prices go down, oil companies, employees, owner of land with reserves and providers of services lose money. If the housing market were to become too oversupplied and tank again, millions of home owners lose a tremendous amount of equity. In one case, the loss is felt by a (relative) few. In the other it’s impact adversely affects many.
- Any significant decrease in prices brought on by a large surge in housing production would typically hurt the people who Sen is saying need help the most: young people and first time buyers since housing credit availability typically contracts when prices fall and lender assets become impaired. This means that those with stronger credit and more cash (often not entry level buyers) fare better in times when credit becomes restricted.
Again, the concept that housing and the construction industry can respond to surging prices in a similar manner to the oil industry is desirable from an economic perspective. However, I’m not sure how well it plays out in the real world when the regions where housing is needed most are those where it is least likely to be built. I sincerely hope to be proven wrong in the next few years.
Interest Rate Roulette: Now that the Brexit vote happened we can revert to normal economic journalism where writers try to predict when/if the Federal Reserve will raise interest rates. This week, there is disagreement between two of the most astute Fed watchers out there. John Hilsenrath of the WSJ says that the Fed could raise rates as early as September. Tim Duy says “no chance” so long as the yield curve continues to compress.
Game Changer: Pokemon Go has accomplished something that brick and mortar retailers have dreamed about for years: turning location-aware smart phones into drivers of foot traffic. The implications for commercial real estate and retail in particular are yuge as Nintendo plans to allow companies to pay up in order to be featured prominently on the game’s virtual map. (h/t Tad Springer)
Crystal Ball: The Terner Center for Innovative Housing at UC Berkley has come up with an app that allows a developer to input variables for sites and give an indication of whether or not a project will be approved and built. It’s still in beta but the concept is fascinating. (h/t Ingrid Vallon)
QOTD: “‘I was collecting Pokémon’ is not a legal defense against a charge of trespass, so be sure that you have permission to enter an area or building.” – Wyoming, MN police department Twitter account warning Pokémon Go players not to trespass onto others’ property.
Worker’s Paradise: Venezuela has become the poster child for “it can always get worse.” Hugo Chavez’s worker’s paradise has inflation set to top 1,600% next year as well as an epic food shortage crisis.
Success From Scratch: Dollar Shave Club, which just sold to Unilever for $1 billion in cash is the ultimate modern American success story.
Chart of the Day
A Monkey Walks Into a Bar: A new study found that monkeys are basically furry little drunks. First off I hope this wasn’t funded by tax dollars. Second, if someone wants to buy drinks for me, I can prove that I like to get drunk as well.
Money Well Spent: A woman got stuck in a tree in a NJ cemetery while trying to capture a Pokemon and had to call 911 to have the fire department get her out. Your tax dollars at work. (h/t Ryland Weber)
Citizen of the Year: A woman in Tennessee witnessed a car crash outside her (likely trailer park) home where the 67-year old driver died on impact. Rather than calling 911, the woman stole the man’s wallet and used his credit card to buy beer and cigarettes. People are wonderful.
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