The Personal Consumption Expenditure inflation rate from the Department of Commerce showed slower price increases than the Labor Department’s CPI report, with both headline and core PCE inflation coming in below expectations. Headline August PCE inflation expectations were for 1.5%, but came in at just 1.4%, (having started the year at over 2.0%) while Core PCE Inflation was expected to come in at 1.40%, but fell yet again to just 1.3%. This measure has been in near free-fall since the beginning of the year where it was over 1.9%.
The major spending category keeping core PCE inflation from falling even further has been the persistent increase in rents. The Consumer Housing Trends Report for 2017 from Zillow Group sheds light on today’s usual dynamics. The report found that fewer people are moving today than at any point in recent history and a larger share of Americans are renting today than they have in decades with renters accounting for 37% of all households in America. Despite what we’ve heard about the sharing economy and the younger generations’ desire to live asset-light, 57% of Generation Z and 55% of Millennials consider buying over renting. Despite coming of age during the financial crisis, 69% of Millennials believe that owning a home is an essential part of the American Dream, a higher percentage than any other generation!
Our omnipresent Connected Society investing theme is evident in the way that renters search for their home, with 83% using online tools. However, there is room for growth as 32% report encountering difficulties determining whether a rental listing is illegitimate or fraudulent. Buyers also rely on online tools to aid them in their search, with 79% going online and 74% using agents to find their home. We find plenty of opportunity for our Cashless Consumption investing theme to expand as while the vast majority of renter search for their home online, 53% pay their rent in person and 84% sign their lease in person rather than electronically, which accounts for just 16%. Our Cash-Strapped Society investing theme appears in that 79% of renters who moved from a previous rental experienced a rent increase before moving. This theme also emerges in some of the fast-growing markets where rents can consumer upward of 40% of a typical renter’s income, despite the conventional wisdom that total housing costs should account for just 30% of income.
Despite the tight housing market, 50% of sellers report selling their home for less than the list price, a manifestation of our Cash-Strapped Consumer, even though across the United States, the number of homes available for sale has fallen year-over-year every month since February 2015. Buyers just don’t have the funds and/or access to loans as growth in consumer lending has been slowing. We also see room for growth in our Connected Society in the selling process, as 89% of sellers list with an agent and 36% attempted to sell their home on their own, yet only 11% sold without an agent. As for timing, sellers on average have their homes listed on the market for just over three months with 51% receiving two or more offers on their home. Despite the tight inventories, 76% of sellers have had to make at least one concession.
We’ve written before how our Cash-Strapped Society means more home improvements rather than trading up. The Zillow report found that 86% of homeowners have no plans to sell within the next three years and less than 23% say their home is in like-new condition. Given that 77% report their home could use some at least some updating, 72% have plans to conduct at least one home improvement project in the next 12 months. The most popular improvements are painting the interior (25%), bathroom improvement (22%), landscaping (21%), and replacing carpet or flooring, (21%) all good news for Home Depot (HD) and Lowe’s (LOW).
The post-financial crisis regulatory overhaul was intended to seriously tighten lending standards, yet 29% of first-time home buyers put down just 3% to 9%. This doesn’t leave a whole lot of room for home prices to fall before a homeowner finds themselves underwater. Recall that at its peak, roughly 33% of homeowners with a mortgage were underwater during the financial crisis. Today that number has dropped to around 10%.
The bottom line is that the fundamentals of the housing market have materially changed which makes comparisons to historical norms less useful than in the past at best and misleading at worst. On the positive side, homeownership rates have stopped declining and today sit around where they were in late 1994.