Income and age will determine American’s future housing needs

Consumer demand

SHARE THIS STORY

US housing Sept13Affordability is the key factor in today’s markets.  And nowhere is this more true than in US housing.  The subprime lending boom of the early 2000s is now long finished.  And US GDP growth averages just 1.7% since 2000.  So understanding the detailed picture of income levels is becoming critically important for forecasting future demand.

Housing used to be the largest market for chemicals and plastics in the subprime period, when housing starts reached 2.2m/year.  Each new house is worth $15k of sales according to the American Chemistry Council, making today’s market worth only $14bn compared to its $33bn peak.  Thus it is clearly important to understand how affordability is likely to impact future demand.

Sadly, US income levels are still very dependent on race.  Thus as the chart shows*, Hispanics (blue line) are least likely to be able to afford a new house, whilst Asians (purple) are best placed:

  • The average house price of $146k is 5.1x median Hispanic income
  • Blacks (green) are also badly placed, with a ratio of 4.6x
  • Whites (red) at 3.6x are very close to the average ratio (black) of 3.7x
  • Asians are at a ratio of 3.2x

Interestingly, these ratios are very close to those in the pre-2001 subprime boom period.  These averaged 4.9x for Hispanics, 4.4x for blacks, and 3.5x for whites, with an overall average of 3.5x (BLS Asian data only starts in 2002).

US credit Sept13This might suggest that the future will be similar to then, and that the market would be driven by the needs of the 87m white and 5m Asian households.  Without subprime lending, the 15m black and 15m Hispanic households would probably find it more difficult to buy, given their average lower incomes.

Certainly the change in credit standards for mortgages would support this argument.

As the chart from the Wall Street Journal shows, required credit scores have risen since the Crisis began.  Equally, they are harder to earn with unemployment rates higher.

AGEING BABYBOOMERS ARE MOVING OUT OF THE SUBURBS
However, there is also another dimension to the question, namely age range:

  • There are only 20.5m households (of all races) in the prime first time buyer age range of 25-34 years
  • There are also only 21.7m in the next key range of 35-44
  • 24.8m are in the 45-54 range, whose needs will change as they join the 55-64 range and approach retirement
  • There are already 21.7m in this range (equal to the 25-34 and 35-44 cohorts)
  • And increasing life expectancy means the largest group is the 25.9m aged >65

This suggests instead that the future is most unlikely to repeat the pre-subprime period, when Boomers of all races were in their prime house-buying period.  Indeed, survey data already suggests that there is a drift back to the cities from the suburbs, as older people want to be closer to health and other facilities.

Thus home ownership rates are already in long-term decline, back at 1995 levels, having peaked almost a decade ago.

TODAY’S YOUNG WEALTH CREATORS CAN’T AFFORD TO START NEW HOUSEHOLDS
US household Sept13Equally important is that 36% of young adults in the 18-31 year-old range are still living with their parents for affordability reasons.  Their unemployment rate is double the national rate of 7.3%, whilst those with degrees find it difficult to save for a deposit due to high levels of student debt.

As the chart from the New York Times shows, this is adding to the decline in household formation.  It peaked in the late 1980s, as the Boomers set up home.  But the false boom of the subprime period has now disappeared, with levels now below 1m/year.  Instead, home ownership rates have now moved into long-term decline.

The recent ‘recovery’ has thus been investor-led, with half of all homes purchased for cash.  Today’s higher interest rates thus mean it has probably already peaked.

Instead, companies need to revisit their now outdated views of how the urbanisation megatrend will develop.  Income levels and age range are likely to be critical factors in determining the products and services that people need and can afford to buy.  

 * Based on the S&P Case-Shiller US average home Index, and Bureau of Labor Statistics (BLS) data

PREVIOUS POST

Scenario planning critical in forecasting 2014 China product growth

01/10/2013

Anyone not closely studying trade data is likely to make some very expensive mis...

Learn more
NEXT POST

Maersk's $3.7bn new ships investment underwater as global 'demographic dividend' ends

03/10/2013

The red line in the above chart from the Financial Times shows how far Eurozone ...

Learn more
More posts
The Top 5 pandemic paradigm shifts
28/06/2020

The Covid-19 pandemic has accelerated the fundamental changes which were already underway in global ...

Read
Hertz goes bankrupt as non-essential consumer demand disappears
24/05/2020

The US Federal Reserve has now spent $7tn bailing out Wall Street. But it couldn’t save the 10...

Read
Smartphone sales head into decline as affordability becomes key
10/05/2020

The smartphone sales decline accelerated in Q1, as Strategy Analytics report: “Global smartpho...

Read
China’s plastic ban and recycling launch marks end of ‘business as usual’ for plastics industry
26/01/2020

Paradigm shifts start slowly at first, and it is easy to miss them. But then one day, they suddenly ...

Read
Automakers face stiff headwinds in big emerging markets
19/01/2020

Brazil, Russia, India and China disappoint as manufacturers face investment demands of EVs © Bloomb...

Read
Portugal shows the way to climate neutrality by 2050
24/11/2019

“If you don’t know where you are going, any road will do”. The Irish proverb’...

Read
The next billion phone users will be buying $10 smart feature phones, not $1000 iPhones
10/11/2019

Smartphone sales plateaued in Q3, down 9% since Q3 2017’s peak of 1.55bn, as the chart shows....

Read
Companies ignore the Perennials 55+ generation at their peril
13/10/2019

Nearly a third of the the world’s High Income population are now in the Perennials 55+ generat...

Read

Market Intelligence

ICIS provides market intelligence that help businesses in the energy, petrochemical and fertilizer industries.

Learn more

Analytics

Across the globe, ICIS consultants provide detailed analysis and forecasting for the petrochemical, energy and fertilizer markets.

Learn more

Specialist Services

Find out more about how our specialist consulting services, events, conferences and training courses can help your teams.

Learn more

ICIS Insight

From our news service to our thought-leadership content, ICIS experts bring you the latest news and insight, when you need it.

Learn more