The economy has more or less recovered from the housing market collapse and ensuing Great Recession from a decade ago with various economic metrics such as real median personal income and unemployment rate approaching pre-recession levels. Despite all that, the homeownership rate continues falling to its lowest levels since the 1970s. If the economy has more or less recovered, then why is home ownership still falling?
The answer is the housing market is experiencing a cultural shift that is strongly driven by the Millennial generation. As of today, the majority of Millennials, born between the early 1980s and mid-1990s, now represent the largest share of the population and appear to prefer apartment living over home ownership in order to prioritize other expenses or experiences. Millennials are characterized by their decisions to delay marriage, home buying, starting a family, and other components of the traditional American dream. Driving these decisions are the trends towards increased life expectancy, more time spent on education, and concerns with taking on large amounts of debt after growing up during the Great Recession – the country’s largest recession in the 80 years since the Great Depression.
Broadly speaking, consumers are now, and will likely remain, older and presumably more financially stable when they decide to commit to these major life decisions. This, when coupled with changes in consumer regulation, should lead to decreases in the delinquency and charge-off rate for mortgages, which in turn limits the potential for collection and debt portfolio purchases by the ARM industry.
To properly examine this cultural shift, we should examine changes in the homeownership rate, a measure of the proportion of households that are owner-occupied, over the last two decades. As shown below, homeownership grew significantly throughout the latter half of the 1990s and into the early 2000s due to accommodating government lending programs and a booming economy. Since the housing market collapse of the mid-2000s, homeownership generally declined under credit constraints and inverted home relative to loan values.
The Millennial generation experienced the massive boon of the credit economy in the 1980s and irresponsible lending (and borrowing) practices during the late 1990s to mid-2000s that contributed to the Great Recession. These individuals faced ballooning student debt and limited job prospects when they entered the labor force, while being exposed to their family’s financial struggles. These conditions and experiences influenced Millennials to value financial conservatism on a personal basis in order to avoid repeating the mistakes of their parent’s generation who were, in large part, overleveraged with consumer debt. This led Millennials to pursue even higher degrees and avoid debt at all costs, unless they are confident it is debt that will not hinder their financial freedom. Further contributing to the decline in home ownership is the less than stellar credit ratings of many Gen Xers that lost homes during the crisis and were relegated to renter status.
The above graph shows monthly housing starts since 2000, which is a key indicator of builder perceptions of the housing market. The last six years suggest a far greater demand for multifamily housing over single family homes, otherwise builders would not have increased construction of multifamily housing by nearly 450 percent compared to a growth of nearly 150 percent for single family homes. This divergence is all too telling.
Single family houses were built at faster paces relative to multifamily housing preceding the crisis but saw a massive decline in 2006 following the market collapse. By examining the above graphs, we can infer that the massive decline in homeownership is being driven by a change in demand from Millennials and, to a lesser degree, younger Gen Xers. Is this a trend that is expected to continue indefinitely, and what are the effects going forward?
First and foremost, this doesn’t mean that home values and mortgage debt – the largest asset class and amount of consumer debt in the U.S. – will falter. Instead, it suggests that consumers are more inclined to rent in the immediate, and put off buying a home until they are better prepared to take on this rather sizeable financial commitment. Therefore, trends towards multifamily housing will not continue indefinitely, but are a product of the changing culture of “settling down and starting a family” later in life once financial stability has been achieved.
Second, delaying home purchases until later in life will not negatively affect home prices in the housing market. In fact, it should, in theory, lead to a stronger and more stable housing market. By delaying home purchases until financial stability is achieved, Millennials (and some Gen Xers) are less likely to go delinquent or default on their mortgages, even with increasing overall debt, which should lead to lower volatility and more predictable growth.
Lastly, this effect may spill over into other consumer debt segments of the economy. If Millennials and Gen Xers are less likely to take on mortgage debts until they are debt free, or close to it, then they are more likely to invest in repaying existing debt obligations. As a result, the ARM industry must closely monitor trends to avoid investing heavily in markets with limited growth potential as the these two generations continue to come into their own and, undoubtedly, influence the industries around them.
In September, 2016, the IRS announced that it contracted with four debt collection agencies to begin collecting certain overdue federal income tax debts starting in the spring of 2017. This potentially lucrative contract has raised a number of questions among collection agencies and other ARM service providers that industry experts Mike Ginsberg and Randy Kamm addressed in their recently recorded podcast about this important topic.
The IRS tax collection program represents a veritable “mother lode” of new business for the ARM industry. However, only transparently-managed, fully-compliant collection agencies with scalability to absorb volume, robust data security standards, and skilled and professional workforce will be eligible to receive this windfall of account placements.
This podcast sheds light on why the third attempt at an IRS private collection agency contract is likely to succeed following the important lessons learned from the first two failed attempts over the past 20 years. Assuming this attempt is successful, the Joint Tax Committee of Congress estimates this program will recover around $2.5 billion over the next 10 years after expenses.
One of the important topics covered in this podcast is whether subcontractors will be utilized to handle the volume. It’s apparent there’s more than enough business to expand the network to additional large firms as well as potential small business subcontractors. Randy discussed why he doesn’t think there will be subcontractor work for third- party collection agencies. Historically, the IRS has been very conservative in permitting third-party vendors. Randy thinks this has to do with security concerns, and stated in the podcast, “We are dealing with income tax return information and very controlled provisions under the law who could have access to this information. It is controversial that the IRS is allowing collection agencies to be prime contractors, much less having a network of subcontractors”. Despite the IRS’ history of conservatism, this has the potential to be an enormous contract that may necessitate the use of subcontractors to ensure performance which may lead to a highly scrutinized subcontractor vetting process.”
This podcast is a product of KG Prime, Kaulkin Ginsberg’s market intelligence service. For more information about how your company can access timely ARM research to help you make decisions about growth, please contact us at firstname.lastname@example.org. To contact Randy Kamm with any questions about this contract, please email him at email@example.com.
ARIA Resort and Casino
Las Vegas, NV
February 7th-9th, 2017
The premier industry event celebrates its 20th anniversary! DBA International is in full gear making preparations for its 20th Annual Conference. It’s one of the most well-attended events in the industry, attracting more than 1,100 participants. The event provides abundant networking opportunities with key players in the debt buying industry, including collection law firms, collection agencies, major creditors, and international members. It’s also the perfect opportunity to learn about the latest trends impacting the industry and meet your certification requirements.
Four Seasons Hotel
Las Vegas, NV
May 10th-12th, 2017
This content rich educational conference gives the techniques, strategies and resources for maximizing collection and recovery outcomes. Our goal is to enrich the intensity of the conference for the exhibitor, attendee and sponsor alike with an unparalleled learning experience. This is an exclusive gathering of industry professionals like none other!
The Ritz Carlton
Montreal, Quebec, Canada
June 18th – 20th, 2017
ICG was originally formed by Dennis Punches nearly five decades ago, in 1967, as Men of Ideas. As the CEO and Founder of Payco American, the largest collection agency in the world at the time, Dennis wanted to establish a group comprised of decision makers from the largest debt collection agencies in the world to meet once a year. They would get together to discuss the business and industry trends, and build camaraderie, getting to know one another on a personal and professional level. This continued for decades, and the original members were truly recognized as the market leaders.
Today, ICG consists of some recognized market leaders. Concerted efforts are now being made to expand the group’s presence to include ARM professionals in the U.S. and other credit economies across the globe.
Going forward, participants in ICG will include CEOs from the largest first and third-party collection agencies, collection law firms, and debt buying operations. In the U.S., participants will come from major market sectors including banking, telecom, healthcare, government, student loans and commercial. Outside of the U.S., the focus will be on the largest ARM companies in particular credit driven countries. Discussions will focus on the big issues that affect all collection professionals regardless of their location.
Jim Richards, CEO of Capio Partners, said, “I am excited about the changes we are making at ICG and believe they will reinforce the original mission of this elite group. We as a group believe that utilizing Mike Ginsberg and his organization will broaden our access to the best and largest industry leaders in the world today.”
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