Many millennials have become homeowners, but a significant portion of them is still waiting to jump into the housing market. Not only are they facing tight inventory due to more homeowners keeping their ultra-low mortgage rates, but the competition for prime real estate has been exacerbated by continued buying by baby boomers. Mortgage rates are surging past 8.0%, dampening what had already been a challenging market to become a homeowner.

We know the challenges ahead for the housing market over the medium term, namely these higher borrowing costs. But the larger question looming is what do the demographics tell us about what we can expect longer term? Once we have these higher rates behind us, can we expect demographics to still be a strong tailwind? And an equally important question for market analysis is how truly under-built is the US housing market?

Long-term US population growth is revised downwards

The Census has not been updated since 2017. Without updated Census numbers, Fastmarkets pivoted to another reputable data source for the nation’s long-term demographic profile. The Congressional Budget Office (CBO) released its latest estimates by age class in January 2023; its projections are lower than what the Census predicted in 2017. In 2037, the end of our forecast interval, the CBO currently projects the total US population will be 357.6 million, while the 2017 Census projected 368.4 million for that year — a difference of 11 million people (Figure 2). From 2023 to 2037, the CBO expects the US population to grow by about 0.4% per year, compared with the Census estimate of 0.6% per year, driven almost exclusively by immigration as birth rates will remain well below replacement rates over the forecast.

However, on the plus side, the CBO projections are more positive than what was released in July 2022, thanks primarily to higher immigration levels that are now tracking above pre-Covid-19 levels. According to the Migration Policy Institute, the US accepted 1 million immigrants as permanent residents in 2022, on par with pre-pandemic trends. Moreover, the State Department reported that it issued nearly 517,608 immigrant visas in FY22, over 50,000 more than in FY19. With one month left in FY23, the State Department issued another 588,611 immigrant visas, a 14% increase over the prior year.

Despite mortgage challenges, headship rates improve

Despite rapidly rising mortgage rates, household formations trended well above 1.0 million units in 2022 and continued to do so in the first two quarters of 2023. In 2022, households rose by 1.7 million units, with households that owned homes significantly outpacing those that rented. The headship rate ‒ which is defined as the number of total households divided by the population ‒ can be used to calculate a proxy for household size. But in a sign of how heated the housing market had become, those headship rates, while still low historically, have improved significantly. In 2022, the headship rate for the key demographic of 25-34-year-olds held at 44.6% compared with a low of 42.9% in 2017. The rate for 35-44-year-olds improved as well, rising to 51% in 2022 from a low of 49.2% in 2018. The improvement in the headship rate has been supportive of above-trend household growth despite the much slower population gains.

Headship rates could even be higher if not for the fact that the share of young adults living at home has been quite high, which is another element of the pent-up demand story. That share climbed after the Great Recession and has remained stubbornly high. The share hit a record level in 2020 as the pandemic ravaged the gig economy and hit young workers especially hard. The share dropped in 2022 and fell to 32.3%, slightly above the 2019 level of 31.6% but will remain high historically, partly due to affordability issues that are growing more acute (Figure 3). With the labor market holding up well in 2023, we expect the share of young adults living at home modestly fall again. But mortgage rates of over 7.0%, the resumption of student loan payments, high rental rates and general shelter affordability challenges will limit how much lower this share can go in the near term.

This share of young adults living at home has meant far fewer people in the shelter market than what the demographics would suggest. In a comparison of the headship rate of millennials to Generation Xers and baby boomers when they were 26-41 years old, Fannie Mae found that the headship rate of both boomers and Gen Xers was 53% at that age range. If millennials had formed households at the same rate as boomers and Gen Xers, the shelter market would have an additional 3 million households.

Large population increases are due to decline

Despite the lower headship rates and more young adults living at home, the sheer size of the millennial generation has been historic. But given current demographic projections, this surge in the population aged 25-34 is unlikely to continue. While the country will still have a high number of these prime-aged homebuying adults through the next few years, the large population increases are now in the rearview mirror. The average homebuying age is 31-32 years old. According to the US Census, between 2009 and 2019, over 5.2 million Americans entered the prime homebuying cohort of 25-34, but this age group will not continue to grow at such a fast clip in the next decade. While we have seen an upward revision to the latest CBO population growth projections, this massive demographic boost being over is still preserved.

Between 2022 and 2032, the population aged 25-34 will grow by 438,000 people to reach 46.4 million. Although this is an upward revision from -89,000 people in the 2022 CBO outlook, this is significantly slower than the millions recorded in the previous decade. Overall, the population in the next decade will grow more slowly, gaining about 15 million people from 2022 through 2032, compared with over 21 million people from 2009 to 2019.

While the 25-34 year olds will grow less robustly, the country will see continued gains for the 35-44 year old group. From 2009 to 2019, this age group basically trended sideways, averaging 41.7 million people in 2019, about where it was a decade before. But from 2022 through 2032, the age class will gain 3.3 million people. This age group is a bit older for first-time buyers, but it will likely mean more repeat buyers in the market potentially looking to trade-up from their first home.

Although this outlook for population is less positive over the long term, the market has not been building enough homes in the last decade to meet the household growth the US has been experiencing. In particular, there have not been enough starter homes, and that has been worsening the affordability crisis of the last few years. But how under-built is the current shelter market? Assuming a target vacancy rate of about 12% (a more normal level of housing inventory) and a total headship rate of about 51%, Fastmarkets estimates that the market is currently under-built by about 2.0 million units. So, while we are expecting slower population growth, there is still an under-supplied element to the forecast that will be supportive of construction running above household formation trends in the medium term.

For more information on how the demographic updates affects our housing and wood products demand outlooks, check out our latest 15-year forecasts on the customer portal, or speak to our team about accessing our news, analysis, forecasts and more.

The post How changing US demographics will affect housing demand appeared first on Fastmarkets.

The challenges ahead for the housing market in the near term are well-known, namely higher borrowing costs and a softening macro economy. But the larger question looming is what the demographics tell us about what we can expect in the longer term. Once we have these higher rates behind us, can we expect demographics to still be a strong tailwind?

With the latest 15-year lumber and panel release, we have lowered our housing starts and household formations forecasts. In this article, we will examine the reasons behind the downward revisions to our demographic outlook.

Declining headship rates and missing young adult households

Using US Census Bureau formations, we estimated that household formations grew by over 3.0 million in 2020 and by about 1.0 million in 2021. The demographics have been supportive, but headship rates have been lower than historical averages. The headship rate – which is defined as the number of total households divided by the population – can be used to calculate a proxy for household size.

For decades, the US headship rates of young adults have been declining, suggesting the US housing market has been missing millions of new young adult households. Close to 46% of adults ages 25-34 were household heads between 1990 and 2000. For several years, the headship rate for this age group declined, hitting a bottom of 40.2% in 2017. The headship rate has improved since then but remains lower than historical averages (Figure 1).

If the headship rate had averaged closer to 46% since 2011, the market would have had 8 million-10 million more households in this age group. This does raise the question: Where did all of these potential renters/owners go?

More young adults are living at home

Headship rates are low because the share of young adults living at home has been quite high. That share climbed after the Great Recession and has remained stubbornly high. While this share leveled off in 2019, it rose to its highest level since at least 1983 in 2020 as the pandemic resulted in major job losses, particularly among the young and gig workers.

With the labor market as tight as it is currently and more young people venturing back into the shelter market, that share eased in 2021, although it has remained elevated. This level should improve again in 2022 but will remain high historically, partly due to affordability issues that are growing more acute.

This large share of young adults still living at home is an element in the pent-up demand story. There would likely be more demand in the housing market if affordability were not so constrained and rates were not so high. But this high share also potentially represents a demographic shift as well, and some of it is likely permanent.

Pew Research reports that the demographics that showed the greatest gains in population growth (Hispanic and Asian Americans) are more likely to share a home with relatives, suggesting that the number of young adults living at home will continue to be above historic averages.

Despite the lower headship rates and more young adults living at home, the sheer size of the Millennial generation has been historic (Figure 2). But given current demographic trends and adjustments to projections, this surge in the population is likely mostly behind us. While the country will still have a high number of adults reaching prime home-buying age through the next few years, the large population increases are now in the rear-view mirror. Between 2010 and 2021, over 6.0 million Americans entered their prime home-buying years, but this age group will not continue to grow at such a fast clip.

2017 US Census figures were outdated

We based previous long-term formation projections on the last US Census data, but the Census has not updated its projections since 2017. Declining birth rates, slower immigration and the impacts of Covid-19 suggest that those Census figures are now outdated and too optimistic.

Why were the US Census figures too optimistic?

1. Fertility rates. Fertility rates fell after the Great Recession and never recovered as the Census expected; in fact, rates have been declining relentlessly, exacerbated by the pandemic. In 2020, the rate hit its lowest level since the government began tracking the data in the 1930s. Fertility rates are now well below the “replacement level” of 2.1 births per woman that would be required for the US population not to shrink without immigration.
2. Mortality rate. Prior to the pandemic, life expectancy had essentially flatlined. Covid-19 resulted in higher deaths overall and worsening societal ills such as deaths from opioid overdoses also affected the mortality rate. All of this has meant a smaller “natural increase” in the population (births minus deaths) than what the bureau projected. While the 2017 Census official estimate for the US population in 2021 was about 335 million, the actual figure came in at just under 332 million.
3. Net migration. Net migration in particular has been a weak spot for the Census forecast, and actual immigration levels have come in well below the bureau’s 2017 projections. According to those estimates, the baseline foreign-born population for 2020 was forecast at 46.7 million, while the low immigration scenario was 44.8 million. The foreign-born population for 2020 came in a 44.1 million, even below the bureau’s more pessimistic 2017 scenario. While immigration rebounded in 2021, at 45.3 million, the foreign-born population was still below the Census projections of 47.4 million by about 2.0 million people.

Without updated Census numbers, Fastmarkets pivoted to another reputable data source for our latest long-term lumber outlook. The Congressional Budget Office (CBO) released its estimates by age class in July 2022, reflecting the demographic challenges of the last few years. The CBO projections are lower than what the Census predicted in 2017 (Figure 3).

At the end of our forecast interval in 2037, the current CBO projections call for the total population to be at 354.6 million, compared with the last Census figure of 368.4 million – almost 14 million fewer people. From 2023 to 2037, the US population is expected to grow by about 0.4% per year, compared with the Census estimate of 0.6% per year.

The housing market is still under-supplied despite slower population growth

While this demographic change is a negative, the market has not been building enough homes in the last decade to meet the household growth the US has been experiencing. In particular, there have not been enough starter homes and that has been worsening the affordability crisis of the last few years. But how under-built is the current shelter market?

Assuming a target vacancy rate of about 12% (a more normal level of housing inventory) and a total headship rate of about 51%, Fastmarkets estimates that the market is currently under-built by about 2.0 million units. So while we are expecting slower population growth, there is still an under-supplied element to the forecast that will be supportive of construction running above household formation trends in the medium term.

Nonetheless, with this forecast, we have lowered our housing outlook out to 2037 to account for what is shaping up to be a weaker period for demographics compared with the previous decade.

While housing construction in the medium term will likely outpace household formations somewhat given under-building, over the longer term construction should cycle back to underlying demographic trends. As with last year, we do assume that headship rates will continue to improve, though for the age classes under 65 the rates will stay below pre-Great Recession peaks.

In last year’s long-term outlook (2026-36), the forecast called for household formations to average about 1.20 million units per year. But with this year’s release, formations in 2027-37 will average a lower 1.01 million units per year. Assuming net removals of about 250,000-300,000 units per year and seasonal home demand of 60,000 units, underlying demand for shelter should average about 1.37 million-1.45 million units per year in the last decade of the forecast, compared with last year’s estimate of 1.55 million.

For more information on how the demographic updates affects our housing and wood products demand outlooks, check out our latest 15-year forecasts on the customer portal, or speak to our team about accessing our news, analysis, forecasts and more.

The post How are changing prospects in US demographics impacting housing and wood product demand? appeared first on Fastmarkets.