The Butterfly Effect and Housing

“Predictability: Does the Flap of a Butterfly’s Wings in Brazil Set off a Tornado in Texas?” That is the title of a famous academic paper by MIT meteorologist Edward Lorenz, who noted that small atmospheric changes in one microclimate can have consequences far away.

Forbes columnist Jeff DeAngelis recently cited that Butterfly Effect paper when looking at an interesting house stat cited by the Wall Street Journal in a story, entitled:  “U.S. Homeownership Rate Falls To Lowest Level Since Mid-1990s.


The article pointed out that household formation – which has traditionally led to a rise on house starts – is now operating under a new dynamic.


“Data from the U.S. Census Bureau suggests that more young people are making the move out of their parents’ home and into rentals,” DeAngelis writes.  “This may not seem important, but in our interconnected world, that small piece of good news could turn out to be one driver that gives our slow-to-grow economy a much needed push.”


Could the departure of those young people into apartments be a flap of a butterfly wing that creates a pop in housing elsewhere?

“As more Millennials sign their first leases, think of all the furniture, bedding, and housewares it takes to furnish even a small apartment. Consider also the economic boost to local grocers, restaurants, and bars, not to mention the tax rolls of state, city and local governments, when these renters start living on their own…All this because one college grad found a job.”


But does it really help housing?


Perhaps it helps, but only for those that build rental units.  (Last year developers started construction on a little less than one million new housing units, and one in every three of them was an apartment built for rent. Rental rates have climbed 13% since 2009.)


However, even with Mr. DeAngelis’ optimism, the WSJ article is a little more dour, citing the move to apartments as a reason for suppressed rates of homeownership.


“The homeownership rate measures the share of U.S. households that own their home, but it doesn’t capture everyone under that roof. For instance, a 23-year-old college graduate that lives with his or her parents while searching for a job is neither a renter or a homeowner, and their situation isn’t reflected in the homeownership rate.  That changes the moment a child gets a job and leaves home to rent their first apartment. At that point they are a renter household, which pushes up the renter rate and drags down the homeownership rate.”


The WSJ goes on to note that “the thaw in the job market is prompting many young people to form new rental households, an important first step on the road toward homeownership.”


Clearly, what we should all be hoping for is the availability of good jobs, and it’s been a long fight to get that aspect of the economy back online to the rates of job creation we saw in the late 1990s.  In recent data, the employment among people ages 25 to 34 reached 75.9%, a five-year high, but up just a tiny fraction from last year, when it was 75.4%.


Which flap of the butterfly wing should we pay attention to to predict housing? Seems like jobs is the big one, followed by the leading indicator of apartment rental rates.  Or maybe we should just count cars at the local Ikea parking lot and see how many millennials are buying new couches and kitchen gear. With a little more employment, lending, time, and collaboration, we could see new household formation return to more normal pre-recession levels.