Below is a complimentary Demography Unplugged research note written by Hedgeye Demography analyst Neil Howe. Click here to learn more and subscribe.
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A new study from the University of Arizona predicts that millions of Boomers and Xers will struggle to sell their homes between now and 2040. Every year, the author calculates, the sellers of some 500,000 to one million homes, especially in suburban or rural areas, won't find buyers without steep price declines. (Journal of Comparative Urban Law and Policy) |
NH: Making a long-term housing forecast is a perilous enterprise.
Back in the early 1990s, with the economy running in low gear, a who's who of U.S. economists (including Gregory Mankiw, the Boomer version of Paul Samuelson) predicted that America was entering into a decades-long era of depressed housing demand and home prices. Why? Mainly because it seemed certain that a small "baby-bust" generation of Xers would fail to buy new homes like Boomers had in the 1980s.
It didn't work out that way, of course. With falling mortgage rates and an accelerating economy, Xers were more than happy to leverage up and buy homes even as Boomers eagerly traded up to even bigger McMansions.
Over the next fifteen years, home prices and homeownership rates soared. And by 2005 annual housing starts exceeded their peak year during the 1980s.
On that cautionary note, let us assess this new effort by Arthur C. Nelson at the University of Arizona to gaze into the next twenty years.
One immediate red flag (IMO) is that Nelson, a neo-urbanist who has long argued against suburban sprawl, was already predicting plummeting demand for single-family homes nearly a decade ago. He believes strongly that compact walkable communities are a superior living arrangement. (Neourbanists call them "liveable" apparently because they think other communities are not.) Which is fine. Except that the reader is forewarned that his strong conviction may warp his forecast.
Once inside the report the reader finds, indeed, that Nelson's forecast is built on tendentious assumptions. The worst is the way he dumps all homeowners into three boxes depending on their age: "starter" (under 35); "peak" (35-64); and "downsizing" (65+).
From 2010 to 2040, he says, the "starter" population will hardly increase at all. And of all the remaining growth (+22 million households), some 20% will be "peak" and 80% will be "downsizing."
See the challenge?
Nelson assumes that the burgeoning number of senior households will demand a different sort of the home, a "downsizing" home. This will push almost all new construction toward smaller and more "liveable" neo-urban units while leaving America's existing stock of big homes on big lots, even without future construction, almost large enough to accommodate all new "starter" and "peak" households.
Given the inevitable geographic mismatch between supply and demand, this pretty much ensures that many existing large homes will be stranded in regions with many more sellers than buyers.
Nelson tilts the argument further in his favor by assuming that everyone's housing preferences will steadily shift toward small units in neo-urban settings. He is aware of all the AARP surveys showing that today's new Boom seniors intend to "age in place" in their big homes. But Nelson believes that much of this aging in place is "involuntary" and that most Boomers are eager to move. He also believes that Millennials have rejected the large suburban home for good and that this preference won't change as Millennials get older.
The net result, as you might imagine, is a suburban and rural apocalypse. In the table and map below, Nelson indicates that from 2017 to 2038 as many as 18 million large-lot homes will have to be "absorbed."
That's his word for redundant, which I guess means no sellers at any price--though Nelson doesn't much discuss price adjustment. Among many other policies, Nelson proposes that the federal government should go out and steadily buy these homes from aging Boomers, apparently to prevent a large home price decline in these counties. (Millennial taxpayers will no doubt be delighted to bear the cost of supporting the market value of all these Boomer homes.)
This is Nelson's bottom line, for what it's worth. I didn't accept this thesis before (see "Who Will Buy All the Boomer Homes?"). And I don't accept it now.
As I've already suggested, I think Nelson goes astray at several points. His "lifecycle bin" approach to suitable housing is especially misguided. There is no law of nature that dictates that people always prefer the same type of housing at each phase of life. Different generations acquire different tastes and values and make different life choices.
In midlife Boomers chose to live in much larger houses than their own G.I. Generation parents did at the same age. And now that they're retiring most Boomers are committed to aging in place rather than relocating (as did so many of their parents) to senior communities and nursing homes.
One reason many senior Boomers want to age in place is because they're still employed. Another is that they want to stay close to their adult children, with whom they are much more closely connected than their own parents were with them. A historically large share of these young adults are in fact living in their Boomer parents' homes. These important generational shifts don't figure into Nelson's analysis.
As for the Millennials themselves, here Nelson does lean on a generational trend. Over the last century, every generation of young adults has preferred to live in smaller homes and closer to urban centers than older adults. But in this case Nelson assumes that this preference, to a significant extent, will age with Millennials as they grow older.
Maybe Nelson is right. Or maybe not (See "Millennials Love Tiny Homes and Community.") It will take time to know. Millennials may be manifesting neo-urbanist home preferences today only because they are marrying and having kids at older ages and cannot afford larger homes near the cities where they aspire to have careers.
Over the last few years, in any case, it seems that Millennials have started to vote with their feet in favor of suburbia after all. (See "Millennials Ditching Big Cities for the Suburbs.") Joel Kotkin, a vocal defender of suburban America, has accused neo-urbanists of forcing their own views down the throat of the rising generation.
At this point, let me stress that I don't disagree with Nelson on all counts.
I do agree that, over the next twenty years, the total demand for housing units of all types will slow to by far the lowest YoY growth rate in American history. This will be driven, first, by an ongoing deceleration of the growth rate in the number of U.S. adults. (This demographic projection is nearly certain.) And, second, by an ongoing increase in the number of adults per household--as a rising share of units house multi-generational families. I don't see this generational trend changing course any time soon. (See "Household Formation: Why Is It Declining--and Where Is It Going?" and "How Togetherness Is Killing the Housing Market.")
Nelson is certain that the brunt of all this deceleration will be borne by large exurban and rural homes on big lots.
Here, I don't share Nelson's certainty.
The Covid-19 pandemic, interestingly, points to a very different future. Where have home prices and rents been rising fastest this summer? Big houses in the exurbs.
Where have they been sinking? Apartments and condos in the major cities, especially in such expensive and trend-setting downtowns as Manhattan, Boston, and San Francisco. These are places where no one thought prices would ever drop.
Among all the cultural creatives migrating away from these big cities with their laptops are millions of Millennial professionals. Many find themselves pleasantly surprised by how much nicer life is without the stress and commute and high cost. Nelson, in an article he wrote in 2007, dismissed the prospect of many people ever working away from urban central offices. "Don't count on telecommuters," he wrote.
Maybe now, 13 years later, he would like to take those words back.
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ABOUT NEIL HOWE
Neil Howe is a renowned authority on generations and social change in America. An acclaimed bestselling author and speaker, he is the nation's leading thinker on today's generations—who they are, what motivates them, and how they will shape America's future.
A historian, economist, and demographer, Howe is also a recognized authority on global aging, long-term fiscal policy, and migration. He is a senior associate to the Center for Strategic and International Studies (CSIS) in Washington, D.C., where he helps direct the CSIS Global Aging Initiative.
Howe has written over a dozen books on generations, demographic change, and fiscal policy, many of them with William Strauss. Howe and Strauss' first book, Generations is a history of America told as a sequence of generational biographies. Vice President Al Gore called it "the most stimulating book on American history that I have ever read" and sent a copy to every member of Congress. Newt Gingrich called it "an intellectual tour de force." Of their book, The Fourth Turning, The Boston Globe wrote, "If Howe and Strauss are right, they will take their place among the great American prophets."
Howe and Strauss originally coined the term "Millennial Generation" in 1991, and wrote the pioneering book on this generation, Millennials Rising. His work has been featured frequently in the media, including USA Today, CNN, the New York Times, and CBS' 60 Minutes.
Previously, with Peter G. Peterson, Howe co-authored On Borrowed Time, a pioneering call for budgetary reform and The Graying of the Great Powers with Richard Jackson.
Howe received his B.A. at U.C. Berkeley and later earned graduate degrees in economics and history from Yale University.
