It’s the dawn of the fourth quarter, and many of us who are involved in the real estate industry are starting to look into the crystal ball, trying to anticipate what 2016 will bring. The Fall ULI Conference is always ideally timed in this sense because it offers a high-level perspective of the economy and the industry as a whole. This year, my Residential Neighborhood Development Council brought in John Burns Real Estate Consulting to discuss the “headwinds and tailwinds” that will have an impact on the housing market and the industry as a whole in 2016 and beyond.
There has been much speculation about the Millennial generation and how these individuals will affect the economy as they age. The best comparison we have for such a large group of individuals coming of age is the Baby Boomer generation, but the similarities end there. While Boomers demonstrated a strong inclination toward entering the workforce, getting married, and having children, Millennials have not followed this same path. Mr. Burns argues that due in large part to the Great Recession, older Millennials have pushed off “household formation” – i.e. a married couple living together under one roof. Many individuals in this generation sought higher education degrees, which has left them with an unprecedented amount of debt. In some cases these individuals have formed households, but have postponed having children due to these economic circumstances.
Mr. Burns argues that older Millennials’ postponement of household formation and having children has created a significant amount of pent-up demand. He believes now that the economy has improved, this generation will increase its rate of household formation and will start demanding the types of resources that we initially saw with the Boomers – homes, vehicles, childcare, and more. These “demographic tailwinds” will be a positive driving force for the housing market and the economy as a whole, as Mr. Burns predicts that 15 million new households will be formed over the next ten years, led primarily by those who were born in the 1990s.
While the demographics paint a positive picture for growth in the housing market and the economy, there are still many factors that could influence the market in either a positive or negative way. Key considerations include debt worries, high asset valuations, uncertainty in global markets, increasing interest rates, and lack of trained labor for new construction. Other regional considerations include contraction in the oil industry, spending cuts, and regional drought.
Despite these economic uncertainties, in general Mr. Burns predicts the current recovery will mirror other similar regional downturn/recovery cycles including the Houston cycle (1983-2002) and the Southern California cycle (1988-2005). Both of these regional cycles experienced sharp decline over a 3-4 year period, followed by several years of stagnation, and then over a decade of strong recovery. At this point we have begun the recovery phase and Mr. Burns predicts we are in for at least another decade of overall growth.
As we look to 2016, one thing is certain – it is good to be in Texas. The employment rate, housing market, and economy in general here has emerged more quickly from the recession than other areas of the country. At RVi, we have been lucky to grow our team significantly over the past year with the addition of a third office and over 10 new staff members and many of our clients and allied firms have experienced similar growth. So with crystal ball in hand, I say cheers to continued growth for all of us in 2016.