US housing demand used to be a major support for the US economy. But that was in the days when millions of new BabyBoomer families wanted to set up home in the suburbs and raise a family. The rule was simple – if prices were high, you just drove 10 miles down the freeway to find a new suburb where home prices were $10k cheaper.
But today, the kids have left home, and the Boomers are entering retirement. So they don’t need family homes in the suburbs any more. And falling fertility rates mean there are not enough younger families to replace them.
Equally important, as the blog discussed back in February, is that the real picture is actually worse than the headline view. The highest fertility rates today are in the low-earning Hispanic and Black communities - which means the recent temporary recovery in home prices has simply made owning a home even less affordable for them:
- Latest Census Bureau data shows only 46% of Hispanics, and 43% of blacks own their own home
- By comparison, 73% of White non-Hispanics own their home
Thus it is really no surprise that home ownership rates hit a new low in Q1 at 65%. This was back at the 1995 level – when the youngest Boomer families were still setting up home for the first time.
Equally, it is no surprise that the US economy finds it hard to grow at SuperCycle rates, as the New York Times notes:
- Annual household formation halved to just 569k between 2007-2013, from 1.35m between 2001-2006
- Residential investment as a share of the economy is around half its average post-War level
- On its own, this has reduced GDP growth by around 2% compared to the pre-2008 period
Instead, the need for cheaper multi-family units continues to rise. These are now 34% of total sales - a level not seen since 1984. But it was common before 1975, when the oldest Boomer was only 29 years old. As the Wall Street Journal notes:
“Growth in rental demand is combining with long-run demographic trends that are expected to continue to tilt U.S. home construction toward “multifamily” units, a category that includes everything from garden-style apartments to towering condominiums. The baby-boom generation is moving into retirement and empty-nesthood, prompting many to downsize to smaller quarters. The generations behind them, meantime, are having fewer children, later in life, so need less space.”
The impact of today’s demographic changes is fundamental to the potential growth rate for the entire western economy. The reason is that today’s changing demographics ripple outwards. Housing demand itself is key for other major industries such as autos and chemicals, as well as for employment itself.
The blog will therefore discuss these areas in more detail tomorrow.