Economist says millennials will determine future of housing market

TAMPA — The chief economist of Fannie Mae, the national mortgage giant, came to town this week with a mixed bag of news about the housing market.

Among the positives: Even if the Federal Reserve raises interest rates in September, rates on mortgage loans are likely to remain low for several more months, economist Douglas Duncan said. Home sales are expected to stay strong.

But Duncan had words of caution, too.

The long-term health of the housing industry depends heavily on millennials — young adults ages 18 to 34 who outnumber even baby boomers. Although millennials may dream of home ownership, their income is so far below that of previous generations that most cannot afford to buy.

"Demographics drive housing,'' Duncan said. "What turns renters into buyers is employment and income. We've seen employment pick up but not yet income.''

Duncan was in the bay area on Thursday to address a seminar for Realtors sponsored by Supreme Lending, a Dallas-based mortgage banking company with an office in Tampa. As Fannie Mae's chief economist, Duncan issues forecasts for the government-backed corporation that helps support the housing industry by buying and insuring mortgages.

The Great Recession officially ended six years ago, and 3 million new jobs were created last year alone. But the recession continues to have an impact on housing, one of the major drivers of the U.S. economy.

"This is the weakest recovery of the last eight recessions,'' Duncan said. "In no previous recession until this one did people expect their incomes to fall. In this one, they expected them to fall a lot. Is that a good environment to buy a house? No.''

The lingering effects of the recession have been especially hard on millennials, many of whom have come out of college unable to find good-paying jobs.

Although down from a peak of more than 10 percent in 2010, unemployment among young adults is still almost 6 percent — higher than prerecession levels.

"Only in the last year has the pace of job growth for the 25 to 34 group gone up,'' Duncan said. "Boomers are done buying, so new household formation will be almost exclusively millennials. That's why real estate people care.''

As they grow older, millennials are marrying and forming households. But with their incomes still comparatively low, they are renting, not buying. And they won't buy until they make more money.

How important is this age group to the future of real estate? So important, Duncan joked, that Fannie Mae's new building in Washington, D.C., will have a "millennial observation deck so we can look down and see what they're doing.''

Duncan warned that the housing industry should not expect a huge boost from the millennials' predecessors — those Generation X'ers now ages 35 to 49.

"They were some of the hardest hit by the (foreclosure) crisis,'' he said. ''Some of those who lost their homes seven years ago are now coming back. But there are several million less of them than there are boomers, so they're not going to replicate baby boomers'' in the volume of home purchases.

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For Florida, Duncan told his Tampa audience, the housing outlook is brighter than it is nationally.

"The good news in Florida is that the acceleration in employment has been faster than anywhere else in the country. In most markets, you are starting to see construction pick up.''

Duncan noted that sales of existing homes are almost back to prerecession levels. Though tighter lending standards will keep bubble-style buying in check, he predicted prices will continue to rise until more new homes hit the market.

"Nationally, there are only 60,000 finished new homes for sale — that's the lowest since the '60s. The population is 2 1/2 times as large as it was then. That's why housing prices are rising 3.5 percent, which is more than incomes are rising. It's supply and demand.''

Asked if the "shadow inventory'' of foreclosed houses could affect prices, Duncan said bank-owned homes are "moving through the system so slowly'' that they won't have much of an impact.

He himself bought one — in Cape Coral, once the foreclosure capital of the country.

Contact Susan Taylor Martin smartin@tampabay.com or (727) 893-8642. Follow @susanskate.