In this episode of The REconomy Podcast™ from First American, Chief Economist Mark Fleming and Economist Ksenia Potapov discuss how demographic forces can influence both home-buying demand and supply as millennials and Baby Boomers age into important phases of life that will impact the housing market.
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Listen to the REconomy Podcast™ Episode 73:
“So, the bottom line is the demographics for home buying remain very favorable in the coming years. There's a large generation of potential first-time home buyers who will drive demand for homes. Many of them were buying during the pandemic, bidding up the price of homes because supply is so limited. In the short term, high mortgage rates and reduced affordability may delay, but likely not eliminate their transition into homeownership.” – Mark Fleming, chief economist at First American
Mark Fleming - Hello and welcome to episode 73 of The REconomy Podcast, where we discuss economic issues that impact real estate, housing and affordability. I'm Mark Fleming, chief economist at First American.
Ksenia Potapov - And I'm Ksenia Potapov, economist at First American. Today, we are expanding our time horizon a little bit and talking about population trends, and how they will impact housing supply and demand dynamics. Odeta is unable to join us today. She's currently watching all of the Star Wars films in order. She'll be back for the next podcast.
Mark Fleming - Star Wars. For our listeners benefit, our podcast production team made a bet with Odeta -- they would watch all the Harry Potters, if she watched all of the Star Wars. Seems I am the only one who's watched both. But, in the theme of demographics, maybe that's just a generational thing.
Ksenia Potapov - Sounds like it. I think the first-ever Star Wars films I watched were the prequels. So, if you say Obi Wan, I think Ewan McGregor. I bet you think of Alec Guinness, who was in the original trilogy. And those are pretty good generational markers for us. But I suppose for Odeta, you can tell a millennial apart by them sorting themselves into a Hogwarts house. That's a classification.
Mark Fleming - I think that's true. And I'm harking back, I actually remember going and seeing the original Star Wars with Alec Guinness in a movie theater. But I digress. One reason why housing is so important is obviously that everybody needs it. Demographic trends can help us anticipate how many people will need housing, as well as roughly when, where and what kind of housing. For example, we started to talk about the large demographic wave of millennial homeownership demand. And the real rise of millennials as a home-buying 'force.' Get it? Force? Star Wars, the force? On our Econ Center, all the way back in 2016. The demographically driven surge in home-buying demand and house prices during the pandemic was not entirely surprising. The pandemic and the peak of millennial demand for homeownership practically coincided with each other.
Ksenia Potapov - We can foresee these demographic trends because they tend to be pretty slow moving. People age at an average pace of one year every 12 months. So they're very predictable.
Mark Fleming - Shockingly predictive, I love this, you're basically breaking down ages into monthly monthly editions. Nice one, Ksenia.
Ksenia Potapov - I'm expecting a crystal ball award for that one. Also, generations tend to come in waves. A small generation is followed by a larger generation, followed by a smaller generation again, and so on.
Mark Fleming -
Yes, recall that when Baby Boomers came along, they were the largest generation in history. They were followed by Generation X, which is smaller, and then the millennial generation -- an echo of the Baby Boomers, which has now surpassed the Baby Boomers to become the largest generation.
Ksenia Potapov - So, at any one time, when looking at the overall population by age, you'll see these peaks and troughs at different ages, as a larger generation makes its way through life. These generational waves tend to have a big impact on the housing market because they shape demand dynamics based on where in the housing consumption lifecycle that generation is.
Mark Fleming - Yes, the stages of housing consumption throughout life. When we are young, we obviously live with our parents. Then, when we eventually move out, we form our own households and often rent before transitioning into homeownership. As we age, it's typical to see consumption of housing increase, as we need, and can afford, more space for ourselves, our children and our backyards with barbecues. Eventually, our demand for housing begins to decline as we downsize, move in with our children, or move into a retirement community and transition out of homeownership.
Ksenia Potapov - And today, we are going to look at the demographic trends at two different ends of this housing lifecycle, the transition into and out of homeownership and how these demographic trends are impacting housing.
Mark Fleming - Yes, let's dive in. First stop, millennials, of course.
Ksenia Potapov - Always millennials. All right. The homeownership rate for millennials lags behind their generational predecessors. Millennials have prioritized education, which takes time and money and have delayed marriage and family formation, which are motivators for, and are correlated with, becoming homeowners. Previous generations made these lifestyle choices in their 20s. Millennials are making them in their early to mid 30s. I guess that's why they say 30 is the new 20.
Mark Fleming - Exactly. Millennials, the largest generation to date, are currently aging en masse into their 30s. In fact, the population of 30-to-39-year-olds will continue increasing through at least 2030, according to Census Bureau population projections. I guess they're using your average of 12 months approach. And they're higher educational attainment is translating into higher earning power.
Ksenia Potapov - As of 2022, over half of millennial households are homeowners, that still leaves many more young households who want to become homeowners. Now, talking about the where millennials have been relatively more successful at becoming homeowners in more affordable markets like Minneapolis, Tampa Bay, or Philadelphia. These are markets with higher millennial homeownership rates relative to more expensive markets like San Francisco, New York or Boston. But, by and large, an overwhelming majority of millennials live in large metropolitan areas.
Mark Fleming - And we do know that, as people age, they often move out of the urban core to the suburbs. When you're young, you might be okay with renting a tiny apartment in a trendy neighborhood because you're close to all those urban amenities and job opportunities. But, as you get older, you might prioritize more space, a different set of amenities like parks, good schools, less noise and that backyard barbecue.
Ksenia Potapov - Yes, migration away from the urban core started before the pandemic, but accelerated in the last few years. In 2022, urban counties and large metropolitan areas lost population at the highest pace, while suburban counties, as well as counties in small- and mid-sized metropolitan areas, gained population. This trend is likely to continue, especially as millennials continue to age into homeownership and go after those parks and good schools, and backyard barbecues.
Mark Fleming - Another impact of the pandemic that we need to consider is remote work. During the pandemic remote work became a lot more common obviously. We sit here today, exemplars of this remote work concept, each in our own home recording this podcast together. It's given many households the option to relocate wherever they please, including markets with more affordable housing. But, is that going to reduce housing demand in large cities?
Ksenia Potapov - So, the body of research on remote work so far suggests that the availability of remote work in dense expensive markets has led to some out migration. But any reduction in housing demand from out migration seems to be counterbalanced by the increase in household formation. So, if you work from home, you might not want to live with roommates, and also the demand for more space. So, if you're at home more often, maybe you prefer a home office or a bigger yard. As it stands today, remote work doesn't seem to be a headwind for housing demand in the big population centers.
Mark Fleming - So the bottom line is the demographics for home buying remain very favorable in the coming years. There's a large generation of potential first-time home buyers who will drive demand for homes. Many of them were buying during the pandemic, bidding up the price of homes because supply is so limited. In the short term, high mortgage rates and reduced affordability may delay, but likely not eliminate their transition into homeownership. Okay, so moving on to the other big generation now.
Ksenia Potapov - Yes, we've largely seen the big transition into homeownership play out already, but we have yet to see the transition out. Just as younger generations have been transitioning into homeownership later and later compared to their generational predecessors. Today, seniors have been living longer and staying in their homes and increasingly aging in place.
Mark Fleming - We don't often think about it that way because these are already existing homeowners, but seniors aging in place increases housing demand relative to previous generations.
Ksenia Potapov - With a greater propensity for aging in place, we would need more housing supply overall to accommodate demand from first-time home buyers. A Freddie Mac study from a few years ago estimated that if the generation of people born between 1931 and 1959, behaved like earlier generations, nearly 1.6 million housing units would have come to market by 2018. Today, that number would likely be even bigger.
Mark Fleming - The largest generation in history before millennials came around, the Baby Boomers, who are not yet downsizing and transitioning out of homeownership. They are between the ages of 59 and 77 today. So, when are we expecting to begin to see the shift?
Ksenia Potapov - Based on previous generations, we generally see that transition happen around 80 years of age. Of course, it may shift to be later for some, but it's a good estimate. The oldest Baby Boomers will enter their 80s in the late 2020s. But the peak will be entering their 80s in the mid-2030s. So, over the next decade, we should expect to see the Baby Boom generation start to downsize and sell their homes, putting more housing supply on the market. Then, by the mid-2040s, the growth in the 80-and-over population is expected to flatten.
Mark Fleming - That sounds great. But right now we're in the middle of a historic supply shortage. I have a few questions. Like, what kind of homes will be coming on the market and where are those homes located? Are they going to be desirable for the generation of next buyers?
Ksenia Potapov - Big questions. Let's start with the first one. According to the 2021 American Housing Survey, approximately 942,000 single-family homes owned by households headed by a homeowner who is 60 or older, were not considered to be adequate in quality. That might mean anything from lacking a fridge to having no electricity or hot water, inadequate heating during the winter, water leaks or other kinds of defects.
Mark Fleming - You would definitely need to put a lot of money into renovating them, I think that would qualify as a fixer upper. But some of them might become -- tear it down and build a new one, right?
Ksenia Potapov - Now, that still leaves approximately 11 million single-family homes considered adequate in the top 25 U.S. metropolitan areas. There's about 1.5 million units in New York, 852,000 in Los Angeles, and 490,000 in Washington, D.C.
Mark Fleming - Okay, so these are not insignificant numbers, especially given how supply constrained some of those markets are. But that definition of an inadequate or adequate housing unit sounds pretty restrictive. So many of the structures considered adequate would still likely need updating and remodeling -- I'm thinking of like, when was the last time the kitchen was renovated -- to be brought up to date and be attractive to a potential buyer?
Ksenia Potapov - Yes, maybe a lot of painting, some new amenities, that's extremely likely. But, given the locations that they're in, there will likely be buyers willing to spend that money.
Mark Fleming - According to our estimates, there was a deficit of approximately 2 million housing units in early 2023. So, I think it's fair to assume that over the next decade, the housing shortage will narrow and eventually disappear. And people will, because there's such a shortage, be willing to fix those houses up. So, from shortage to surplus, based upon the demographic housing consumption lifecycle.
Ksenia Potapov - So that feels like a very distant future. Because at this exact moment, demographic trends are up against high mortgage rates and an unusually severe lock-in effect restricting supply. There's few existing homeowners who are willing to sell in this mortgage-rate environment. And, while builders are adding new home supply, there is only so much they can build at once, especially given the large backlog of homes under construction accumulated during the pandemic.
Mark Fleming - Yeah, population trends are slow moving, averaging about one year, every 12 months. So it'll likely take years before we actually notice a substantial pickup in inventory because of these generational shifts. All right, there's a lot more we could dive into with generational trends, but then we would be here all day, which wouldn't be such an awful thing.
Ksenia Potapov - Mark, you and I are mostly missing from this conversation as a Gen Xer and a Gen Zer, the forgotten generations squished between much bigger ones.
Mark Fleming - Indeed, our generations never really have the spotlight. I'm sort of thinking of Rodney Dangerfield, Caddyshack. No respect, no respect. 80's movie by the way. Even in 30 or so years, everyone will be talking about millennial retirement dynamics. And, again, skip right over us.
Ksenia Potapov - And moving right on to wrap up. Thank you for joining us on this episode of The REconomy Podcast. If you have an economics-related question you'd like us to feature on a future episode, you can email us at firstname.lastname@example.org. We love to hear from our listeners. And, as always, if you can't wait for the next episode, follow us on X. It’s @MFlemingEcon for Mark and @KseniaPotapov for me. Until next time.
Thank you for listening, and we hope you enjoyed this episode of The REconomy Podcast from First American. We're pleased to offer you even more economic content at firstam.com/economics. This episode is copyright 2023 by First American Financial Corporation. All rights reserved.
This transcript has been edited for clarity.