Blink and you would have missed the brief fall in US house prices late last year.
Even as the Federal Reserve raised benchmark US interest rates at the fastest pace in decades and the average mortgage rate surged above 7%, the housing market has barely budged. It’s a dynamic that’s defied expectations, with many analysts blaming the so-called ‘lock-in’ effect — where inventory is squeezed by homeowners who are disincentivized from selling their house and taking on a new mortgage at a much higher cost.
Economists at Barclays Plc, however, are looking elsewhere to explain America’s weirdly resilient housing market. In a note titled “Blame the Boomers” they point the finger at the millions of aging Americans who are helping to push up demand for homes.
“The US housing sector is on the upswing again, even with mortgage rates at multi-decade highs,” Jonathan Millar, Barclays senior economist, writes in the research. “Although much has been attributed to shortages of existing properties and mortgage lock-in effects, we think strong demand is a symptom of the aging population.”
While the idea of an older population keeping home prices high might seem counterintuitive — after all, an aging and eventually declining population should in theory reduce housing demand — the Barclays analysts argue that we’re currently in a crunch point where more and more boomers are reaching retirement age and forming new households, but aren’t yet elderly enough to actually freeing up existing inventory.
“Many presume that the gradual deceleration in the overall population should diminish the pace of increase in housing demand,” they say. “Although such effects eventually occur, for the time being the dominant effect is from composition, with more of the population shifting into age ranges where people are more likely to form a housing unit. In our view, these upward pressures on household formation are boosting unit demand, helping to push up both prices and construction. Although this effect hit its stride around the time of the pandemic, it has been ramping up for more than a decade.”
To understand the impact on housing, it helps to know about household formation. Morgan Stanley housing strategist James Egan explained the concept on an Odd Lots episode last year:
“So to talk about household formations, let's talk about how we define a household, if you will. And so basically a household is a unit living together in a shelter. It can be ownership or rentorship. I like to use an example where you basically have four people that just kind of, maybe they graduated from college. They moved to, let's say New York City, where we're sitting right now. And they live in one apartment. They are one household. When they moved, when they graduated, when they moved to the city, that was a formation of a household because as part of their parents' household before, that they didn't count as one. So you have one household formation.
What we're really going to be talking about is headship rates. That's the percentage of any group, cohort of the population, how you choose to define it — we're defining it by age here — that heads their own household. So this group of people, okay, their headship rate’s 25%, four of them in one household, two years later, they all move into their own apartment. We now have four households. Formation would be three. We went from one to four. It's a net figure. And the headship rate for this very small cohort is a hundred percent. So when we think about how household formations are going to evolve, we're looking at how those headship rates evolve in particular by age.”
As Egan notes, headship rates are intertwined with age. The rate picks up as people tend to leave college or move out of their parents’ house in their twenties, and then continues to rise as they leave their roommates and start new families in their thirties. Later on, people may get divorced or retire, and this can start a whole new wave of household formation and a boost in headship rates.
That means that even though population growth in the US may be slowing, the sheer number of baby boomers still in household formation mode is boosting demand for houses and outstripping existing supply. People of retirement age (65 years or older) now account for about 16.5% of the US population, compared to just 13% in 2010, Barclays says.
“Given this age profile for the headship rate, it is not surprising that aging places upward pressures on household formation,” that analysts add. “Although decisions to form households are economic ones at a micro level, we can gain a strong sense of the state of housing demand by applying assumptions about the aggregate headship rates within age groups to population projections for each age group through time.”
For Barclays, all of this leads to a supply-demand imbalance in US housing that’s unlikely to be resolved any time soon, with higher home prices the result. US house prices have already defied expectations even as mortgage rates rise. (At Morgan Stanley, Egan expects US house prices to reach a new record next month). And of course, boomers who have already spent decades accumulating their wealth have a leg-up on younger would-be homeowners. The one silver lining is that higher house prices seem to be encouraging construction of new houses — for now.
“Data suggest that demographics are likely to support demand for the foreseeable future, consistent with annual household formation of around 1.3mn units through the end of the decade,” the Barclays analysts say. “Meanwhile, the accumulated shortage of new housing units remains considerable, putting upward pressure on house prices and rents, thereby encouraging additional construction.”