Much Time is Needed Before Housing Can Recover

According to a recent Realtor.com survey, the top two obstacles to owning a home are (1) High Home Prices and (2) High Down Payments.

High Home Prices

Despite Home Prices continuing to fall, home prices are still too high.

Here's the Standard and Poors (S&P) Case-Shiller 10 City Composite Index since 1987:



Notice the dark blue line and the parabolic pattern reminiscent of the 2000-2002 Bubble.

The magenta line is the one year moving average of the Composite 10 index. If the Composite 10 index is above the One Year Moving Average, Housing Prices are in a Bull Market. If the Composite 10 Index is below the One Year Moving Average, Housing Prices are in a Bear Market. This is currently the case.

Still Unaffordable

According to a study looking at California Home Prices, many counties have incomes that are 50% of the income needed to afford the median priced home.

Previously, before the recent Credit Crunch, people were able to "afford" the homes based on loose underwriting standards, exotic mortgages, low promotional interest rates, and other adjustments. We are now experiencing the downside to this trend.

High Down Payments an Obstacle

Because of the recent Credit Crunch, Lenders have tightened lending standards. According to some, many people are trying to get financing, but they can't. Higher down payments are needed to buy homes now.

But how can these people afford the down payments when gas prices remain high, food prices remain high, the stock market is in a downtrend.

When combined with home prices remaining high and unaffordable, it will take some time before the housing market recovers.

Housing Annual Returns



According to Robert Shiller, author of Irrational Exuberance, and the Shiller in the Case-Shiller Index, from 1890 to 2007, the return on residential real estate was just about zero after inflation. Since 1987, it's been about 6 percent.

Robert Shiller also makes the case that if residential real estate returned 10 percent per year, houses would remain incredibly unaffordable.

In the Original Case-Shiller Composite 10 Index Chart above, there are two lines assuming 3% or 4% annual growth since 1987.

Future Housing Boom?

Is there hope for the future? Is there a future housing boom?

The stock market and the economy will eventually recover. Foreign investors, taking advantage of the cheap dollar, could start investing in U.S. properties.

Demographics will fuel the Next Housing Boom

But the real boom may be pushed by demographics.

Three major demographic groups include:

1. Baby Boomers (est: 1946-1964; 44 to 62 years old): 70 million
   
2. Generation X (est: 1965-1979: 29 to 43 years old): 17 million
   
3. Generation Y (est: 1979-1994: 14 to 29 years old): 60 million
   

As you can see, Generation Y comes close to the large Baby Boomer Demographic.

One of the major booms since 1890 (according to Yale Economist Robert Shiller), occurred after World War II as the demand for homes increased. This boom coincided with the boom of the Baby Boomer Generation.



Now, Generation Y, 2nd in size to the Baby Boomer Demographic, is going to be the right age to start families and buy homes. This might be an event similar to the era right after World War II when the Baby Boomers were growing up.

If we estimate that Generation Y would start buying homes between 26-29 years of age, then that would mean that greater number of Generation Y would be of age within around eight years from now.

After a lengthy period of time for the economy to recover, and for housing prices to stabilize or decline to a more stable and affordable level, there could be a future housing boom as Generation Y starts to buy homes.

Jim Cramer and Generation Y: The Perfect Storm

Why are so many college aged students and those in Generation Y crazy about 52 year old, balding, former hedge fund manager Jim Cramer? When Jim Cramer's CNBC "Mad Money" show goes on a college roadtrip, he is often greeted by a great number of screaming, adoring college fans.

According to a Boston Globe Article, Joanna Weiss says that "Cramer has a penchant for madcap props -- he has eaten cereal drenched in soda pop and worn diapers to drill in a point -- and he presides over a busybox of noise machines, pushing buttons like a crazed suburban father. His bulging-vein energy, along with his ability to move markets with yelped suggestions, has drawn the ire of Wall Street traditionalists."

In the same article, Joanna Weiss mentions that Jim Cramer's 22 year old nephew Cliff Mason, helps Jim Cramer make the Mad Money show hip and appealing to Generation Y, a generation that is 2nd in number only to the Baby Boomers.

But there is more to Jim Cramer's appeal to Generation Y. Jim Cramer is benefiting from the Perfect Storm.

In a 2006 Gen Next Survey, the top two goals in life for those in Generation Y is "To Get Rich", and "To be Famous." 81% of all those in Generation Y who responded listed "To Get Rich" as their first or second goal in life. Compare this to those 26 years and older, who ranked "To get rich" as their first or second goal in life 62% of the time.

When asked about their most important problems in life, 30% of Generation Y in the survey listed "Money/finances/debt." To those 18-25 years old, this ranked as their top problem in life (school/education was their second choice). Compare this with those 26 years and older who ranked "Money/finances/debt" as their first problem 27% of the time, and "Health", or "No problems" 15% of the time.

When asked about who they admire, Generation Y admired a "Teacher/Professor/Mentor" 12% of the time (compared to 2% of those 26 years and older), and Entertainers 14% of the time (compared to 11% of those 26 years and older).

When we put all this together, we have the perfect storm. We have Jim Cramer, who has the credibility to make people rich (having a very good record during his time as a Hedge Fund Manager) and also has the energy and presentation skills of an entertainer. We also have Generation Y, who want to get rich, get famous, and whose top problem in life is money, finances and debt. Jim Cramer offers Generation Y an entertaining show that educates, and this coincides very well with Generation Y's goals to be rich and famous, and their admiration of teachers and entertainers.

Generation Y: The Big Opportunity

According to the Business Week article, Generation Y (or Millenials), are those born between 1979 and 1994 (As of 2007, they would be 13 to 28). In terms of numbers, they are the 2nd largest group in the United States after the Baby Boomers.

Some numbers:

1. Baby Boomers (est: 1946-1964): 72 million
2. Generation X (est:1965-1979): 17 million
3. Generation Y (1979-1994): 60 million

With 300 million people in the United States, if we add Baby Boomers and Generation Y, these two groups make up 44% (132M/300M) of the United States population.

Much attention has been given to making money on the Baby Boomers. But if we are to truly profit, we need to look at the demographics and profit from Generation Y as well.