Are demographic changes helping or hurting housing?
The housing market sales doldrums we experience today is partly a result of the smaller Generation X hitting their prime homebuying years. Most anticipate a resurgence of housing when Millennials start buying homes in larger numbers.
Back in 1997 a demographic study shook the homebuilding industry when it said housing demand would crater and house prices would be depressed because Generation X was so much smaller than the Baby Boomers. As it turned out 1997 was the bottom of the market, and both sales and home prices rose dramatically in a 10-year run that ended with the Great Housing Bubble.
So much for demographics.
With such dramatic and high-profile misses, it’s difficult to put too much weight on a demographic study. These studies envision a world where demographics drive all change in the marketplace, and they ignore the fact that people adjust their behavior to suit the circumstances, and economies are far more robust than most imagine.
For example, during the middle ages the Bubonic plague wiped out a third of the world’s population — a catastrophic demographic event. With so many producers and consumers wiped out, the overall world economy contracted, but rather than resulting in a much lower quality of life for the survivors, the trade in luxury goods exploded. With fewer mouths to feed, less resources were devoted to food production, and at least for the rich, quality of life improved.
It’s very difficult to predict what will happen to the economy when the composition of large populations change. It’s doubly difficult to predict what will happen with specific segments of the economy because people will change their behavior to respond to new opportunities.
91% of all US home buying is done by those aged 20-69yrs/old, according to NAR data. In 2015, Millennials (20-35yrs/old) made up 35% of home purchases, Gen X (36-50yr/olds) bought 26%, Boomers (51-70yr/olds) 31%, and the Silent Generation (70+yrs/old) 9%. I’m no great fan of the NAR, but this makes basic sense as most homebuyers need an income to be homebuyers and most 70+yr/olds are retired and have the lowest average incomes of all the above groups.
These numbers also reflect the relative sizes of these age groups. People over 70 buy fewer homes because there are fewer people over 70 who are still alive.
Here’s the very big problem for residential real estate…the chart below shows that over 70% of all the population growth among potential home buyers (20+yrs/old) from 2017–>2030 will be among the 70+yr/olds (chart shows average annual growth for the two groups from 2000–>2016 (left) and 2017–>2030 (right)). This is simply unprecedented in US history.
Based on this data and nothing more, my first reaction is that the over-70 market is set to explode. While many in this group no longer work, they still have income, and many of them accumulated significant assets, and if they want to buy housing, they can pay cash.
To put it in a broader context, the chart below shows annual growth in the 20-69yr/old population (red line) vs. annual growth in the 70+yr/old population (blue line) since 1980. That unprecedented, impending crossover in the lines means everything for real estate and the economy in general.
The impending nosedive in the growth of potential buyers vs. surge in elderly (those more likely to downsize or out-right sell than buy) should be quite disconcerting considering:
This is where the analysis jumps the shark. Why would the elderly necessarily downsize or sell? Perhaps they will chose to age in place. They will respond to whatever opportunity the market presents them, and if they can’t sell to realize other dreams, they won’t. If homebuilders respond to this large increase in demand for over-70 housing, the homebuilders stand to profit.
- Home prices are at or near ’07/’08 bubble peaks meaning any new investments require far more cash down to achieve a positive cash flow
- Mortgage rates can effectively go no lower and a marginal increase is probable (unless the Fed reinitiates QE and implements NIRP)
- Present lending standards are far more stringent than during the ’07/’08 fog-a-mirror NINJA free for all
- The dollar is likely to continue appreciating making foreign buying continually more expensive…and less likely (unless the Fed reinitiates QE and implements NIRP)
- Rents and rent to income ratios are off the charts to new records well above ’08…maintaining the pace of rent appreciation is highly unlikely and rent declines may be the more probable course.
Plus, add in the pace of new housing creation continues ramping up (still only half way to ’08 levels but still far more than can ultimately be absorbed with the changing dynamics). With so few new buyers, a growing quantity of new homes, and so many likely sellers…a very simple question must be asked, who will buy all those houses and at what price?
First, we won’t get a growing quantity of new homes without buyers. Builders aren’t stupid, and they will stop building if standing inventory builds up.
Second, the Millennial generation will drive most new home demand over the next decade or more, and there are more Millennials than there are Baby Boomers.
Third, as Baby Boomers downsize or die, a younger family will buy their home.
So does that mean everything is perfect?
National Association of realtors, August 26, 2016
… the median age of repeat buyers (those who owned a home in the past and are buying another home) has increased, nearly every year, for the last 35 years. In 1981, the first year the data was collected, the median age of a repeat buyer was just 36 years old. In 2015, the median age of a repeat buyer was 53 years old.
Why is that? A couple of factors could be behind the increase in age. Longer life spans have allowed more retirees to enjoy retirement, …
Realistically, this explains 90% of the change.
As for first-time home buyers, there has been a lot of discussion recently among analysts and the media about the typical millennial (born 1980-1995) delaying marriage, delaying child rearing, and delaying the move out of a parent’s home and into one of their own.
While delays in these milestone events is happening among millennials, for those who can manage to overcome numerous hurdles (student loan debt, stagnant wage growth, affordability constraints, and tight credit to name a few) and buy a home, it’s happening at the same age as past generations.
Unfortunately, with first-time homebuyer rates about 25% below normal, many Millennials aren’t clearing those hurdles.
Increasingly today, when first-time buyers do buy a home they don’t feel like they have to wait until marriage. Forty-four percent of first-time buyers in 2015 were not married, compared to 32 percent in 1981.
This may or may not be meaningful depending on what these singles do when they get married. Will they keep their first house as a rental? Will they sell it for equity for a down payment on a family home? Will the new couple simply move into the house one of them already owns?
It’s impossible for a demographer to know how these new single owners will behave. The only thing I am certain of is that they will react to their circumstances at the time, and so single answer will be right for all of them.