Where the buyers are

Shadow inventory, meet the shadow households. Nearly one million households nationwide will be created in 2011 – roughly 130,000 in California alone – and start driving real estate sales and consumption in 2012, according to a prediction by industry analysts and IHS Global Insight.

Generation Y-ers (Gen Y-ers) headline as the main source of these new household formations, along with other individuals who consolidated households during the Great Recession and deferred divorcees who stayed together for financial reasons. By comparison, only 357,000 households were formed from March 2009 to March 2010 nationwide, during the tail end of the Great Recession. For California, that represents about 40,000 new occupancies for what was about 500,000 vacant residential units and single family residences (SFRs).

The million households predicted to be added would still fall short of the historical average of 1.3 million households formed annually, according to the U.S. Census Bureau.

But 1.8 million homeowners were delinquent on their mortgages or in foreclosure nationwide as of January 2011, setting the so-called shadow inventory at nearly nine months of housing. In California, about 40% of our share of the l.8 million (around 250,000-300,000) will end up as foreclosures and be vacated by the current occupants, if occupied.

first tuesday take: The predicted flood of new homebuyers hitting the market in 2011-2012 is a bit optimistic, or worse, at least in California. Jobs are California’s problem at the moment. The current rate of job creation is around 200,000 annually and we need a rate of approximately 400,000 to 450,000 news jobs annually to get the momentum needed for a full recovery of real estate sales volume.

The rate of job creation will determine when Gen Y-ers finally strike out from their parental or communal nests and form their own households, and California won’t add those jobs at a consistent and sufficient rate until well into 2013. first tuesday forecasts the great swell of Gen Y-ers won’t arrive at the homebuying party until 2016-2020, and for many reasons not associated in any way with financial crisis or recession. [For more information on the current jobs growth in California, see the April 2011 first tuesday Market Chart, Jobs Move Real Estate; for more information about Gen Y’s entry into homeownership, see the April 2011 first tuesday article, Americans dream for a home on unstable ground.]

Besides being aware of the new housing features attractive to this up-and-coming generation of homebuyers (and tenants), today’s brokers and agents must be aware of the changing face of lending. Recent regulatory proposals mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) will end up requiring Gen Y to save longer and put up more money up front. They must also meet more stringent credit guidelines than their parents (or grandparents).

While all this is best for the real estate market in the long term, it will not be favorably received by those whose livelihoods depend on sales. Licensees who focus on property management, however, will be in a better position to take advantage of the front-end housing requirements (rentals) of these Gen-Yers flying the nest. [For more information about the housing factors which will attract Gen Y homebuyers in the future, see the February 2011 first tuesday article, The generations have spoken, who will listen?; for more information about one of the many new changes which will affect future homebuyers, see the May 2011 first tuesday article, How much medicine can the sick housing market stomach?]

Re: New households form at fastest rate since ’07 in resurgent U.S.” from Bloomberg.com