Demand for Housing to Remain Strong
By Brad Hunter
Mortgage rates are staying stubbornly high. The forecasts that had called for a gradual decline in the 30-year fixed rate have fallen victim to the shocking federal budget deficits which put upward pressure on long-term interest rates across the board.
Builders have been shielded from the effect of higher mortgage rates by two things: (1) mortgage rate buydowns, and (2) the low level of inventory. The level of inventory is starting to rise meaningfully but is still low. The number of newly listed homes rose 12.2% above last year’s levels (April to April), matching the prior months’ growth rate. This represents the sixth consecutive month of increasing listing activity. If inventory keeps rising, the builders will start to feel more pressure. As time goes on for an individual who is reluctant to sell, personal pressures will tend to mount. The main factors that push people to sell are death, divorce, and illness, followed by upsizing (read: babies), downsizing, moving for a job, moving to a nicer house or a more suitable location.
Household Growth Outlook is Strong: The Role of Generations Y and Z
What drives the level of demand for new housing? Easy. Household Formations. When a young person who is living with relatives or friends breaks out on his or her own, that creates a new household. Stay with me, here, because I have to introduce an economics/demographics term, which is “Headship Rate.” The headship rate is simply the likelihood of a person being or becoming the head of a household. Let’s quickly recap the history of this number. After the Great Recession of 2008-9, headship rates fell, as people in their 20s moved back in with Mom and Dad. This began to go the other way in 2018, as those same people moved out on their own, and got their own place to live. Their headship rates have risen sharply in recent years. But for people under age 25, headship rates continued to fall for a little while longer. New 2023 data from the Census Bureau shows that Generation Z is deciding to move out of their parents’ house than the Millennials did. This is a promising trend for housing demand for the next five years.
This just adds to the already strong housing demand attributed to millennials or Generation Y. Millennials got around to having babies much later than prior generations, and now that they are creating and growing their own families, they are boosting demand as well.
Merge all of that with another long-term trend, which is a decline in the number of people living in a typical home and it gets even better. In 1950, there were 3.8 people per house, on average, falling to 2.5 people per house by 2017, and the projection is 2.0 people per house by 2030. That means that we will need 2X as many houses as in 1950 even if the population didn’t grow at all! We are currently at least 2.5 million houses short, and the shortage is growing due to the current level of housing production.
The housing demand model says: take household formations (about 1.5 million per year), and add 250,000 for replacement demand, and another 400,000 to 500,000 for second-home demand, and you get demand of at least 2.15 million per year, and housing production is running far below that, at 1.3 million.
The upshot of all of this is that the supply-demand equation is very much in favor of builders and developers.
As this article is being written, we are in the middle of the spring season for the housing industry, in which weather and the timing of school tend to allow both buyers and sellers to move freely. The one thing that is dampening the level of sales is the “lock-in” effect, in which people who have sub-4% mortgages don’t want to move, at the expense of having to take a 7% mortgage on the next home. Sooner or later, though, “real life” causes the need for a move, at least for a lot of homeowners, and that means more demand.
New-home builders have a distinct advantage over existing home sellers, in that they can offer mortgage-rate buydowns. We expect to see the homebuilding business continue to do well this year, but the wild card, of course, is the future direction of mortgage rates.
Brad Hunter is the president of Hunter Housing Economics. He may be reached at brad@hunterhe.com.
