INSIGHT: US housing market to hit demographic wall by 2030s

CHARLOTTE, North Carolina (ICIS)–Demographics will weigh heavily on the long-term outlook for the US housing sector as a much smaller Gen Z population reaches prime home-buying age in the first half of the 2030s, according to an ICIS analysis.

Housing is an important end-use market for plastics and other chemistries in the form of paints, wire insulation, house-wrap, sealants, roofing materials, resilient flooring, vinyl siding and more.

New housing also generates sales of appliances, furniture, carpet, fixtures and window treatments. All of these generate demand for chemistry as well. In total, each housing start engenders on average over $13,000 worth of chemistry.

Forecasting housing activity focuses on house prices and mortgage interest rates, both of which affect affordability. Rises in both during 2022 eroded affordability, pushing many potential buyers out of the market.

Economists also consider the inventory of homes for sale, over- or under-building in recent years, consumer confidence, mortgage credit availability, homebuilder confidence, the pool of first-time buyers, government policy and other factors in making their forecasts. During 2021 and 2022, forecasters had to consider shortages of materials, equipment and construction labour.

But what about long-term housing demand? Business leaders in the chemical industry make investment decisions based on the economic viability of a production facility which has a long operating life, often 30 years or so.

Many economic and technical factors impact capital investment decisions, but long-term demand expectations are paramount. And if your product largely goes into building and construction, then long-term housing demand is critical.

ASSESSING LONG-TERM DEMAND
Assessing long-term demand for housing largely focuses on the underlying demographics. About four-fifths of houses built are for new dwelling units (single-family homes, apartments). Underlying physical requirements are of two types – 1) net additions to the housing stock, and 2) replacement of units withdrawn from that stock.

Most of the factors determining this are generally slow-moving variables. Demography along with need for vacancies and second homes are what drive housing demand over extended time periods.

Because a household is defined as an occupied dwelling unit, housing construction in any given year equals net household formation, plus withdrawals from the housing stocks, plus conversion of single large units into smaller units, less combinations from conversions of smaller units into one, plus the change in the number of vacancies.

Changes in the number of families owning two or more residences is another factor causing housing demand to deviate from net household formations. Finally, the addition of children to a family often fosters the need for new and larger houses. Conversely, ageing may foster the need for smaller residences.

New households require a place to live and the factor determining new net additions to the housing stock largely consists of those that determine net household formation.

Thus, the net increase in families and non-family households depends on the size and age of the population – which is well known 20 years out at any given time – as well as marriageable ages, other living arrangements, family size and other social/cultural factors. Changes tend to be gradual.

EVOLUTION OF NET NEW HOUSEHOLDS
Net new households thus dominate the long-term demand for housing. A useful demography to examine is that of the typical age of first-time home buyers. For the Millennial generation – born between 1981-1996 and the largest in terms of sheer numbers – this average age is over 30 years. Thus, we look at the 30-34 year age population.

Going forward, we assume that Gen Z (born between 1997-2012) and Generation Alpha (born after 2012 through mid-2020s) will follow this pattern of first-time home buyers in the 30-34 year age group.

Source: US Census Bureau and ICIS analysis

Figure 1 shows the US population aged 30-34 years from 1970 through 2050 in both absolute numbers and as a share of total population. The chart starts in 1970 with the last of the small Silent Generation (born 1928-1945) entering this prime home-buying age.

The chart also shows the growth of the Baby Boomers (born 1946-1964) into this group starting in the late 1970s through the early 1990s.

Then the smaller Gen X generation (born 1965-1980) entered this prime first-time home buyer age group. And because they were a smaller generation, those aged 30-34 years then declined – both in absolute numbers and relative to population – until around 2010, a period associated with a collapse in net household formations.

Starting in the 2010s, the Millennial generation (born 1981-1996) began to enter the picture and right now the youngest of that generation are entering the prime first-time home buying age. This is providing a tailwind to the US housing sector.

GEN Z MUCH SMALLER
Gen Z are the children of Gen X, and they are a small generation in terms of numbers – and relative to total population – as were their parents. These generations are much smaller in both absolute and relative terms compared to the Millennials and the Baby Boomers.

When this smaller Gen Z generation reaches the 30-34 year age group around 2030, the population in the 30-34 year old range will fall in both absolute and relative terms through 2040 and beyond.

Generation Alpha would normally be large, as they are the children of the Millennials (and grandchildren of the Baby Boomers) but they are not all born yet, so conjecture about the 2040s is just that – conjecture. That said, they will be larger than Gen Z, which should support housing in the 2040s.

So, what does this mean for net household formation? Let’s look at the average growth in households in five-year increments – first and second half of a decade – from 1970 through 2050.

NEW HOUSEHOLD GROWTH SLOWS
We can see from Figure 2 the effects of these different generations in the data. But going forward, we can see that new household formations will ease in the 2030s with the maturing of Gen Z. This will present some headwinds for housing.

Source: US Census Bureau and ICIS analysis

Let us look at the implications for housing demand.

For the period to 2050, we assume that vacancies will return to their long-term average and that increasing wealth will foster demand for second homes. Finally, replacement demand will edge up due to an older housing stock.

Source: US Census Bureau and ICIS analysis

HOUSING STARTS TO FALL OVER 20%
In the 2020s, underlying demographic and other trends suggest average annual starts of 1.52m per year. As Gen Z matures, starts will ease to an average of around 1.20m per year in the 2030s and then 1.15m per year in the 2040s.

The bottom line is that the tailwinds of the 2020s will turn into headwinds in the following decade (2030s). The 2040s is still not certain as Generation Alpha is not fully born yet, but at a minimum will see stabilising forces and possibly a return to higher housing activity.

In the case of housing, ‘Demographics is destiny’ as the 19th century French philosopher Auguste Comte said. Perhaps not 100%, but it is the key driver for the long term and business leaders supplying product into this market should be prepared.

Insight article by Kevin Swift

For help in long-term scenario planning, contact kevin.swift@icis.com

Thumbnail shows a home under construction. Source: National Association of Home Builders.