New Report: Aging Homeowners Drive Growth in Remodeling as Millennials Begin to Gain Footing

Homeowner spending on remodeling is expected to see healthy growth through 2025, according to Demographic Change and the Remodeling Outlook, the latest biennial report in our Improving America’s Housing series. Demographically based projections suggest that older owners will account for the majority of spending gains over the coming years as they adapt their homes to changing accessibility needs. Although slower to move into homeownership than previous generations, millennials are poised to enter the remodeling market in greater force, buying up older, more affordable homes in need of renovations.

The residential remodeling market includes spending on improvements and repairs by both homeowners and rental property owners, and reached an all-time high of $340 billion in 2015, surpassing the prior peak in 2007. [See our Interactive Infographic.] Spending by owners on improvements is expected to increase 2.0 percent per year on average through 2025 after adjusting for inflation, just below the pace of growth posted over the past two decades, and about on par with expected growth in the broader economy.

The large baby boom generation has led home improvement spending for the past twenty years, and its influence shows no signs of waning. Older homeowners will continue to dominate the remodeling market, as they make investments to age in place safely and comfortably. Expenditures by homeowners age 55 and over are expected to grow by nearly 33 percent by 2025, accounting for more than three-quarters of total gains over the decade. The share of market spending by homeowners age 55 and over is projected to reach 56 percent by 2025, up from only 31 percent in 2005.

Gen-Xers are now in their prime remodeling years, and while some are still recovering from home equity losses after the housing crash, many in this generation will undertake discretionary projects deferred during the downturn. And as younger households move into homeownership, they will supplement the already thriving improvement market.

Try the Interactive Infographic

“With national house prices rising sufficiently to help owners rebuild home equity lost during the downturn, and with both household incomes and existing home sales on the rise, we expect to see continued growth in the home improvement market,” says Kermit Baker, director of the Remodeling Futures Program at the Joint Center for Housing Studies.

Even though increasing house prices are encouraging homeowners to reinvest in their homes, they also are raising housing affordability concerns among younger buyers. Climbing mortgage interest rates and rising house prices not only make homeownership more difficult for younger households, but leave those who are able to buy with fewer resources to make improvements and repairs. And while high rents may provide an incentive to buy homes, they also make it difficult for first-time buyers to save for a downpayment.

Some demographic trends are also presenting challenges to a healthier remodeling market outlook. A disproportionate share of growth over the coming decade will be among older owners, minority owners, and households without young children; groups that traditionally spend less on home improvements.

“Despite these challenges, the remodeling industry should see numerous growth opportunities over the next decade,” says Chris Herbert, managing director of the Joint Center for Housing Studies. “Strong demand for rental housing has opened up that segment to a new wave of capital investment, and the shortage of affordable housing in much of the country makes the stock of older homes an attractive option for buyers willing to in invest in upgrades.”

Finally, as a new generation of homeowners enters the remodeling market, specialty niches focused on energy-efficiency, environmental sustainability, and healthy homes are likely to see significant growth. Home automation—encompassing everything from entertainment systems to home energy management, lighting, appliance control, and security—is also emerging as a strong growth market, particularly among younger households.

Looking ahead, there are several opportunities for further growth in the remodeling industry. The retiring baby boom generation is already boosting demand for accessibility improvements that will enable owners to remain safely in their homes as they age. Additionally, growing environmental awareness holds out promise that sustainable home improvements and energy-efficienct upgrades will continue to be among the fastest growing market segments.

Read the full report, try the Interactive Infographic, or join the conversation on Twitter with #HarvardRemodeling.

Defining the Generations Redux

by George Masnick
Senior Research Fellow

How should we define the baby boom, Generation X, and the millennial generation?

In a Joint Center blog published in 2012, I argued that using 20-year age spans for each generation would make it easier to compare them. Since many researchers still use generational definitions that span different and inconsistent age ranges, particularly for millennials, it is perhaps timely to reframe and restate my case.

In keeping with my recommendations, the Joint Center has long identified the cohort born between 1945 and 1964 as baby boomers.Those born between 1965 and 1984 are Generation X, and the cohort born between 1985 and 2004 are millennials (Figure 1). 

However, other analysts use several different earlier dates to usher in the millennial generation, apparently because they want to ensure that the oldest member of this cohort were considered adults at the dawn of the new millennium (i.e. they had turned 18 or 20 in the year 2000). This definition meant that by 2015, the oldest millennials were in their mid-30s, old enough to prompt compelling stories about how many 30-somethings were still living with parents, living in cities, forsaking marriage and childbearing, and delaying homeownership. In contrast, under my recommended cut-off dates, the oldest millennials turned age 20 in 2005 and didn’t start entering their 30s until 2015.

Besides making it easier to compare generations, there are several reasons why the millennial generation should start with those born in 1985 and turning 20 in 2005. As I noted in my 2012 blog, 1985 was the year that U.S. births once again exceeded 3.7 million, the approximate number that demarcated the beginning and the end of the baby boom, as well as the beginning and the end of the “baby bust” that defines Generation X.

Three other big changes occurred shortly after 2005 that significantly altered the way young adults live. First, social media participation skyrocketed. Facebook became available to everyone age 13 and older with a valid e-mail address in September 2006. Twitter became public in 2006. The first iPhone was released in June of 2007. As a result of these and other changes, the share of adults using social media rose from five percent in 2005 to 69 percent in 2016, according to a recent Pew Research publication.

Second, student loan debt outstanding more than tripled between 2005 and 2016, rising from $400 billion to over $1.3 trillion. This high level of debt is thought to affect everything from leaving the parental home, to getting married and starting a family, and purchasing a first home. 

Third, and perhaps most importantly, the economic changes that led to the Great Recession hit hardest among young adults who were in their 20s shortly after 2005. The unemployment rate of adults older than 25 without a high school degree rose from below six percent in late 2006 to 15 percent in mid-2009. (Those with a high school degree or more followed this trend within a year.) Unemployment rates of those with a high school degree or more have slowly improved, but still remain above pre-recession levels. Unemployment rates for those with less than a high school degree have returned to their pre-recession elevated levels, but people in this group generally are making less money and receiving fewer benefits than they did before the recession. Meanwhile, housing costs have returned to, or now exceed, their pre-recession levels.

Using equally broad 20-year age spans produces several important findings about the different generations. To start with, the millennial generation has been larger than the baby boom generation, now or at any other previous time since the boomers were age 10-29 in 1975 (Figure 2). Millennials now number almost 87 million compared to less than 79 million for baby boomers at the same age. This is in contrast to findings of a 2016 Pew Research study that compared generations using millennials with a smaller age range and found roughly equal numbers between these two generations in 2015 (75 million).

Source: Census Bureau Population Estimates 1975-2015

Using consistent age spans also shows the changing ways that immigration has affected the number of people in each generation. In 1995, when Generation X was age 10-29, it was smaller than the baby boom generation was in 1955, when it was the same age. However, because of immigration, by 2005, when Generation X was age 20-39, it already exceeded the number of baby boomers at the same age. 

Immigrants also make up a small but growing share of millennials. In 2015, 9.6 percent of millennials were foreign born compared to 21.4 percent of Generation X, and 15.3 percent of baby boomers (Figure 3). However, according to the latest Census Bureau population projections, the share of millennials who are foreign born is expected to rise to 20.9 percent in 2035 when they are age 30-49, which will boost the number of millennials to 97.3 million (Figure 4).  

Source: Census Bureau Population Projections for 2015

* Data do not allow 85-89 year olds from 85+ age group

Source: Census Bureau Population Projections for 2035

Finally, the constant-age-span approach allows us to identify significant generational differences in race and ethnicity. Overall, in 2015, 45.4 percent of millennials, 41 percent of Generation X, and 28.6 percent of baby boomers were minorities (i.e. non-Hispanic Blacks, non-Hispanic Asian/Others, or Hispanics of any race). Moreover, because of continued immigration, the share of millennials who are minorities is projected to rise to almost 50 percent in 2035 and the share of Generation X is projected to rise slightly to 42.4 percent. In contrast, the share of baby boomers who are minorities is projected to hold constant at 28.6 percent. 

These differences reflect changes for both foreign-born and native-born members of each generation. In 2015, fully 85 percent of both foreign-born millennials and foreign-born members of Generation X were minorities.  In contrast, only 78.5 percent of foreign-born baby boomers were minorities. Moreover, while 41.2 percent of native-born millennials were minorities, only 29 percent of native-born members of Generation X and 19.6 percent of native-born baby boomers were minorities (Figure 5).

* Data do not allow 85-89 year olds from 85+ age group

Source: Census Bureau Population Projections

Looking forward to 2035, the size of the baby boom cohort will drop to about 60 million people because a growing number of baby boomers will pass away. Many millennials and members of Generation X will want to live in the housing units formerly occupied by those baby boomers. Their ability to do so will not only be shaped by the fundamental economic and social changes discussed above but also by whether the large numbers of racial and ethnic minorities in these two generations will have full access to those housing markets, and with it, the ability to achieve the American dream. 

Look Who’s Renting: The People Behind the Recent Surge in Demand for Rental Housing

Dan McCue
Senior Research
Associate 

One of the major trends highlighted in the Joint Center’s recently released report America’s Rental Housing 2015 is the unprecedented growth in the number of renter households over the past 10 years.  The numbers are dramatic no matter how you slice them, leading to an impressive list of facts: we’ve been adding nearly a million renter households a year for almost a decade; the number of renters has grown by fully 25 percent in the past 10 years; there are nearly 9 million more renter households in 2015 than there were in 2005; and in the past ten years we have seen the largest increase in renters of any 10-year period in history on records dating back to the 1960s. This sharp growth in demand has been the primary force behind the widespread tightness in rental markets that has driven vacancies down and rents up for millions of Americans as supply works to respond.  And supply is responding with more multifamily construction currently under way than in any time in the past 30 years.

So who are all the renters behind this recent growth?  The answer may be somewhat surprising, particularly in terms of the age breakdown.  One might imagine that since renters tend to be younger (with a median age of 40 years versus 55 for homeowners), the majority of recent growth would have been from millions of young millennials piling into rentals in high numbers.  It turns out, however that while the millennial generation (born 1985-2004) is indeed the largest in history in terms of population, they are only responsible for a relatively small portion of the growth in rental population over the last 10 years, approximately 11 percent.  In contrast, well over half of the growth in renters (55 percent) – fully 4 million households– was from people aged 50 and over.  Generation-X-ers (born 1965-1984) in the 30-49 year old age group were responsible for 34 percent of all renter household growth since 2005.

As shown by figure 2, much of the growth in the number of renters age 50 and over reflects a boost in population due to the baby boom generation, who are currently age 50-69 and now entirely in this 50+ age group.   However, only about half of the growth in renters over age 50 resulted from population growth.  The other half of growth was due to householders being more likely to rent than in past years.

Figure 2 also shows how the increased rate of renting among gen-Xers was the entire source of growth in the number of renters aged 30-49 year old.  That the number of renters in this age group grew at all over the past 10 years was impressive given that the total number of households in that age group (owners and renters combined) actually declined during this period.  Indeed, at a stage of life where first time homebuying typically occurs, rentership rates for this generation have not fallen off with age like those of previous generations.  Renters are sitting tight, moving less, and making fewer units available for Millenials to enter the rental market. 

In addition to the age breakdown, the incomes of new renter households may also be surprising.  Again, while renters as a group still tend to have lower incomes relative to owners (median income of $34,000 versus $65,000 for owners), the fastest rates of growth over the past ten years has been in high-income renters (Figure 3).  The number of renters in the top 10 percent highest income bracket grew by 61 percent, more than double the pace of overall growth in renters.

Growth in renter households has extended beyond single-person and unrelated roommate households to encompass all types of living arrangements, including those more commonly associated with homeownership (Figure 4).  Families with children made up a quarter of all growth in renters in 2005-2015, roughly evenly split between couples and single parents.

Additionally, with the resurgence in the number of white, non-Hispanic renter households (who made up one-third of renter household growth in 2005-2015), renter growth was split more evenly across races and ethnicities than in the 1990s and early 2000s when the number of white renters was on the decline.  But minority households continued to be a large part of renter growth, as have immigrant households, with foreign-born renters making up fully 26 percent of growth, even with the post-recession slowdown in immigration.

In sum, the wide-ranging surge in rental demand underscores the fact that rental housing remains an important and necessary housing option for people of all races, incomes, and living arrangements, and one that is becoming an increasingly popular housing choice at all stages of life.  The diversity of the population demanding rentals also necessitates a broad range of rental housing options—with an array of types, styles, sizes, amenities, rent levels, and locations—to meet the needs of renters today and in the future.

Where Are All the Homes? Demographic Underpinnings of the Lack of For-Sale Inventory

by Dan McCue
Senior Research Associate

One of the challenges faced by housing markets has been a persistent lack of inventory of homes for-sale. Indeed, the most recent data on existing home sales from the National Association of Realtors® show that for 37 months we’ve been in a seller’s market – traditionally defined as a market in which there is less than six months’ supply of homes listed for sale (Figure 1). And, according to Redfin, this year’s spring buying season saw inventory nationwide hit record lows (see June Housing Markets Sets All-Time Records for High Speed and Low Supply).  In the many markets with few homes available for sale, new listings are almost immediately snatched up, with the high competition among buyers pushing prices out of reach of a growing number of would-be homeowners.    

Note: Data include existing single-family, condo, and co-op units for sale. Annual data are seasonally adjusted monthly averages. 2015 data are year-to-date through July. Source: National Association of Realtors®, Existing Home Sales via Moody’s Analytics.

There are several possible explanations commonly mentioned as to why for-sale inventories remain so tight, including the large number of owners stuck in homes because they are ‘underwater’ on their mortgages, the still-elevated volume of homes in the foreclosure process and held off the market, the lack of new construction in the years following the housing boom, and the many single-family units that have been taken out of the for-sale market to become rentals. But one additional reason not often discussed is demographics, which has also been playing a role in both the lack of inventory and in the slowness in new home sales over the past several years. Indeed, the ongoing generational shift among American households has slowed sales in the short run and is likely to continue to dampen sales over the next two decades.

Demographics and the Reduced Pool of Active Trade-up Homeowners

Over the past ten years, members of generation-X aged into the 30- and 40- year old age groups (Figure 2). As this relatively small generation, once called the baby-bust, replaced the large baby-boom generation now in their 50s and 60s, the population in their 30s and 40s declined. In some cases, the declines were stark. For instance, for the 35-39 year old age group, the population in 2013 was 9.3 percent smaller than it was 10 years earlier, with 10.4 percent fewer households.

Source: JCHS tabulations of US Census Bureau, Population Projections.

At the same time, as the 2015 State of the Nation’s Housing report mentions, the US homeownership rate took a significant dive, dropping to levels not seen in 20 years, with outsized declines among some age groups and the sharpest drop occurring among 35-44 year olds. Indeed, despite all the attention given millennials, homeownership rates among gen-Xers – particularly those currently age 35-44 – are actually furthest below 20-year historical rates of similarly aged adults (Figure 3).

Source: JCHS tabulations of US Census Bureau, Housing Vacancy Surveys.

So in combination, the demographically-driven decline in population of 30- and 40 year-olds was magnified by a sharp drop in homeownership rates, resulting in a significant decline in the number of homeowner households at these ages. Among the 35-39 year old age group, for instance, the number of homeowner households dropped fully 23 percent between 2003 and 13, and among 40-44 year-olds the decline was a substantial 19 percent (Figure 4). 

Source: JCHS tabulations of US Census Bureau, Current Population Surveys.

Traditionally, the 30s and 40s are key ages for housing market activity – particularly for trade-up and new home purchases. Indeed, homeowners aged 35-44 historically make up the majority of trade-up buyers (Figure 5). Fewer current homeowners in this key age group has meant fewer potential trade-up buyers and sellers, meaning fewer people putting their homes on the market, adding to tight inventories of for-sale homes. 

Source: JCHS Tabulations of American Housing Survey data.

Source: JCHS Tabulations of American Housing Survey data. 

Additionally, one of the most common ownership opportunities desired by trade-up buyers is a new home. Indeed, 35-44 year olds are also typically responsible for a high share of new home sales (Figure 6). And the majority of new homes sales to this age group are to those who are currently homeowners, so fewer current owners in this age group has also meant fewer potential buyers of new homes, fewer new home sales, and therefore a sizeable headwind to single family homebuilding. And there are other implications as well, such as for home improvements spending, given that most movers do some kind of post-move improvements, even if it’s just painting the walls, so fewer sales among gen-X has also affected remodeling spending markets as well.

Source: JCHS Tabulations of American Housing Survey data. 

While the millennials and baby boomers attract most of the headlines about how demographic trends are influencing housing demand, gen-X ers may actually be more influential than they get credit for in contributing to the recent weakness in single-family construction, home re-sales activity, and the widespread lack of inventory in many markets. 

One final note, however, is that the aging of the baby boom generation may also be contributing to the low levels of inventory and slower home sales – and this contribution may be a longer-lasting trend than that of the gen-X discussed above. Since mobility rates decline with age, the aging of the baby-boom will mean increasingly higher shares of older households who move less frequently. While there are concerns, most notably expressed in Dowell Myers’ insightful book Immigrantsand Boomers, regarding the potential future problem of elderly baby-boomers unloading a glut of housing on the market as they sell off or otherwise cease to head their own households, the oldest boomers are still only in their late 60s and so mostly many years from exiting the housing scene. And if for-sale inventories continue to remain tight as they are today, we may need to worry about the opposite problem: not enough turnover in the housing market to meet the needs of younger households, at least until boomers do reach the ages when they begin to vacate their homes in significant numbers. At present, it’s still hard to tell how much of the currently tight inventory is due to lingering effects of the housing downturn from longer term demographic shifts. Time will tell.