They call economics a “dismal science,” for good reasons. Economist David Berson, however, makes one thing clear beyond question. The senior vice president and chief economist at Nationwide Insurance, a long-time denizen of International Builders Show proceedings wearing one hat or other, shows with stunning skill that you don’t need Powerpoint slides to let an audience know how hard it is to get a mortgage loan these days.
He spaces about two inches between his thumb and index finger, and says that is how tiny the “credit box” had gotten in the regulatory recoil to the housing meltdown, caused because the credit box had gotten too big—which he mimes with arms spread wide apart at shoulder height.
Now, though, after some policy wrangling and hang-wringing, the credit box is a bit more expansive than it was at its worst. Berson demonstrates this by opening the space between thumb and forefinger by half again as much. Berson takes part in an annual Outlook panel at the IBS, National Association of Home Builders chief economist David Crowe, and Fannie Mae chief economist Frank Nothaft. Last year, the trio called for a healthy single-family starts pick-up of 20 percent over 2013, and an almost inevitable increase in interest rates. Oops!
So, the three economists are taking a Mulligan on 2014.
They predict that an economy that’s on pace to improve as much as 3 percent over the next 12 months will buoy job creation and wage growth, which should support growth in household formations, home sales, new home sales, and construction. This is encouraging.
The picture is really quite a bit more complicated than that. What’s entirely plausible is that the three of them could be sitting in those same three seats next year, explaining “what went wrong” with 2015 as it did—a Polar Vortex followed by an interest rate spike, and a patch of global political unrest—in 2014.
So, we must assume two things, and it doesn’t take charts and tables on Powerpoint slides to make them clear. One is that uncertainty is a given, a trait of our time. So, we’ll live with uncertainty.
The other is that demand for your new homes, such that it is, is not born; it is made.
When David Berson speaks of the credit box, the size that seems just about right in is mind is not what it is now, or what it was in 2012 or 2004, but what it was during the mid-1990s. This, he shows with two hands, palms facing, about 18 inches apart in front of him.
For credit to ease to that point, if it ever does, is going to take effort, across-the-aisle policymaking, and time, more time than the next 12 months anyway.
So, demand, my friends is up to you. If there’s something a fair number of us have taken away from the bright spots, high-end progress to date it’s that activating some of the upper tiers of buyer segments alone won’t necessarily get the whole works building into a recovery.
Now, one of the granddaddy of all consumer trends whose impact is still playing out importantly in our economy and culture, is the two-income household that became a phenomenon for the first time in the 1970s and changed the nature of society as married women in huge numbers joined the “labor force” outside the home.
What came along with that phenomenon, and the development of 401k savings and investment plans, is that households suddenly each began to act more and more like businesses.
We’re a third generation of young adults into that mentality, and the good news is, if you appeal to this new cohort in a way that you’d appeal to an entrepreneurial start-up firm, you’re probably going to do well.
In other words, all too often, we think of the impediments that hold young people back from buying, and it’s 99 percent about the first-cost factors of down payment, interest rates, and monthly principle, interest, taxes, and insurance payments.
That’s only part the way there. Young adults are thinking beyond that, whether they’re entirely aware of it or not. They’re thinking of homeownership in three stages, like a business would: entry costs, operation costs, and exit plan valuation, with appreciation.
The mindset is much more like a business today. That goes to how two-income families changed the way households worked, and saved, and invested, and created wealth unlike the ways they ever did before.
Demand is not born. Invent desire. Make demand.