The truth is that demographic demand from 30-45 year-old Americans, shown in the chart above, could overwhelm price and interest rates as a primary factor. The lowest interest rates and most affordable homes were in 2011 and we built a paltry 320,000 homes. One of the least affordable years since 1960 was 1978. Prices had risen sharply, interest rates were 12 percent and we built 1.4 million homes! Why did that happen? The largest population group before the millennials, the baby boomers, were having kids and buying houses. They wisely defended themselves from future higher rents and built up net worth through the forced saving provided by paying off a mortgage.

Velocity Of Money And The Multiplier Effect

The future of the U.S. economy is being framed by the media. They argue that the length of the recovery should put us on high alert for a recession. Far more important to economic vitality is the velocity of money and the multiplier effect created by the economic activity we have. The Fed poured money into the system from 2009 to 2015 and helped us crawl out of the deepest recession since the depression. There was no pick-up in the velocity of money.

We healed, but we were growing at historically anemic rates. What sends velocity higher? Many other market participants are affected when velocity picks up as the largest population group buys houses, furnishes them, landscapes them, paints and carpets them.

Think of it like this. The last 10 years our economy grew on purchases at fast-food establishments, craft beer vendors and from buyers of new Apple devices. The problem is the workers at the establishments, vendors and those who put Apple devices together either couldn’t afford a house or live in another country. Therefore, the velocity of money was held down and the normal multiplier effect we learned in macroeconomics never started happening until home building picked up. We have not seen this discussion in the media.

Investment Ramifications Of News Framing

We are bottom-up stock pickers and utilize our eight criteria for stock selection. We are finding numerous opportunities to buy companies that would be positively impacted by a pickup in the velocity of money and from the multiplier effect getting kicked into gear. We like NVR (NVR), the nation’s fifth largest homebuilder, even though we are sitting through a temporary lull in home buying. We also see a bright future for our bank stocks, which benefit from a rise in the velocity of money and better interest spreads as economic growth causes rates to rise.

We like a series of companies that cater to 30-45 year-old families with kids. Disney (DIS) is getting ready for a big increase in the number of five to 10-year old children since there are 26 million more millennial Americans than there were Gen Xers. Disney owns the market for wholesome family entertainment right before the number of wholesome homes explodes. Discovery Inc. (DISCA) has HGTV, Deadliest Catch and many of the favorite unscripted TV shows watched by 30-45 year-old families. Target (TGT) is a favorite place and website to shop for above-average income folks. They go in to get three essentials and leave with three things they never planned on buying. The profit is in those unplanned purchases.