The Next Housing Crisis - Relying on Echo Boomers

A 2012 paper entitled "Demographic Challenges and Opportunities for U.S. Housing Markets" by the Bipartisan Policy Centre examines how growth in the number of seniors in the United States (and, for that matter, any developed nation with a large cohort of Baby Boomers) and how it will impact housing particularly as these Americans retire and dissolve their households.

Let's open with a couple of definitions.  Baby Boomers are generally considered to have been born between the years of 1946 and 1964 and it is estimated that in that time period, approximately 76.4 million Baby Boomers were born, making up nearly 40 percent of the total population.  Echo Boomers are the children born to Baby Boomers between the years of 1981 and 1995; there are an estimated 65 million children in this age group.  Since fertility rates dropped over the 50 year period between 1946 and 1995, Baby Boomers generally had fewer children than their parents as shown here:

During the period of the baby boom, women were having between 3 and 3.7 children each; this fell to between 1.7 and 2.1 during the period between 1981 and 1995.  Please note that while the 76.4 million number is commonly used as the total number of Baby Boomers born in the United States, the census in 2000 counted 79.6 million United States residents born between 1946 and 1964 with the larger number accounting for the inflow of immigrants.

Between 2000 and 2010, the number of Americans over the age of 65 increased by about 5 million.  Over the next 20 years, it is estimated that the population of Americans over the age of 65 will increase by over 30 million with an increase of 14.2 million by 2020 and an additional increase of 16.5 million by 2030.  This means that senior Americans will make up 20 percent of the total population, up from 13 percent today.

How will these tens of millions of older Americans impact the housing market?  As adults enter their sixties, the level of household dissolution exceeds the level of household creation, releasing more housing units into the market, particularly over the next forty years.  While many senior Americans currently prefer to remain in owner-occupied housing, a trend that is likely to continue into the future, many of the houses that they occupied while they were raising families are unsuitable simply because they are:

1.) too large (over-housing)

2.) too expensive to adapt for impaired mobility or 

3.) too isolating as they need increased support from family members.

It is estimated that between 2000 and 2010 (before the influx of Baby Boomers into their senior years) that people over the age of 55 released over 10.5 million net mainly owner-occupied housing units to the housing market.  During that same time period, 14.7 million new dwelling were built and the number of new households headed by Americans under the age of 55 grew by 21.8 million.  That means, on net, there was a growth of 11.2 million new households (the difference between the number of households dissolved and the number of new ones formed).

Looking to the future, economists estimate that seniors will release between 10.6 and 11.3 million housing units between 2010 and 2020 and will release an additional 14.4 to 15.0 million units between 2020 and 2030 with 80 percent of these being owner-occupied housing.

The American housing market will increasingly rely on Echo Boomers for its salvation; before the year 2020, it is estimated that Echo Boomers will account for the absorption of between 75 and 80 percent of owner-occupied housing.  Unfortunately, it is this very generation that has suffered from a series of recessions in the new millennium which has resulted in lowered income and an inability to form new households and purchase residential real estate.  As shown on this chart and keeping in mind that today's 24 year olds will have the potential to form new households within the next decade, the number of unemployed younger Americans was still at elevated levels in 2012:

On top of that, it is estimated that only 21 percent of Echo Boomers were married in 2009 with 75 percent being single and never married.  Only 20 percent have children in their homes compared to 30 percent of Baby Boomers when they were at the same stage of life.  As noted, the economy has been particularly hard on Echo Boomers; the median income of 15 to 24 year olds dropped by nine percent between 2009 and 2010 with nearly half of 25 to 34 year olds who moved in with family and friends to save money living below the poverty line.  Another issue facing Echo Boomers is very high debt loads associated with student loan and credit card debt. 

With all of this in mind, the authors of the study generated three scenarios that predict the demand that Echo Boomers will bring to the housing market.  Note that these scenarios each include a constant net immigration rate of 975,000 people per year.  Here are the scenarios:

1.) Low Case: Between 2010 and 2020, 9.7 million new households are generated because of a weak economic recovery and an inability to attain homeownership.  Including people between 15 and 34 years of age plus five years in 2010 brings the total to 15.6 million new households.

2.) Medium Case: Between 2010 and 2020, 12.3 million new households are generated because of a moderate economy recovery.  This scenario assumes that there are moderate reductions in the requirements for down payments and that the rate of household formation is similar to what was seen between 1990 and 2010.  Including people between 15 and 34 years plus five years in 2010 brings the total to 18.8 million new households.

3.) High Case: Between 2010 and 2020, 14.9 million new households are generated because of a strong economic recovery similar to what was seen in the 1990s.  Including people between 15 and 34 years plus five years in 2010 brings the total to 17.1 million new households over the decade.

Under the same economic assumptions, the decline in the number of older households over the decade ranges from 11.6 million to 10.6 million, a factor that is less impacted by economic growth rates.

Here is a graph summarizing the data:

While the number of housing released by America's newly minted seniors is absorbed by the growing number of newly minted households in all three cases over the period from 2010 to 2020, the situation worsens in the decade beyond 2020.  Under the low case scenario (weak economic growth), the number of owner-occupied dwellings released by Baby Boomers will increase and new owners will only be able to absorb 300,000 more units that seniors will release on a national scale.  This near national parity means that many local markets will be oversupplied, meaning that existing Baby Boomer homeowners after 2020 will face some difficult decisions; lowering prices, conversion to rental housing, leaving them vacant or abandoning them.  Sadly, metropolitan areas with a large future supply of dwellings released by an aging population are not necessarily those areas which will have a high future housing demand.  Most states now have a relatively even distribution of Baby Boomers, however, the population distribution of Echo Boomers (and post 1980 immigrants) is much more uneven.  For example, in Michigan, West Virginia, Ohio, Pennsylvania, Rhode Island, Mississippi and Louisiana, the number of seniors exiting homeownership is nearly the same as the number of new households being formed largely because these states had difficulty retaining and attracting Echo Boomers and immigrants.  As Boomers age, the number of dissolving households in these states is likely to outstrip the number of new households being formed, putting downward pressure on the housing market.  In contrast, Nevada, Arizona, Utah, Idaho and Texas have all experienced high birth rates and added a great number of jobs since the beginning of the new millennium.  In these states, the release of owner-occupied housing added up to less than 35 percent of the increase in housing supply required to meet the demands of newly formed households.

Obviously, this analysis shows that the formation of new households by the Echo Boomers is key to the future of the United States housing market.  If the rather lukewarm economic growth experienced by today's young men and women in combination with an elevated number of working "retirees" prevents them from being able to afford homeownership, as the next two decades pass, we could see the housing market, particularly for some types of housing, suffer from further stress.