Although the Population is Rapidly Aging, Young Adults Will Still Drive the Demand for New Housing

by George Masnick
Fellow

Hardly a day goes by when we are not reminded about how rapidly our population will age over the next several decades as the baby boom crosses the 65+ threshold.  For housing analysts, an aging population is often thought of as the key demographic trend that will drive housing consumption over the next 20 years.  This shift in age structure does not, however, mean that elderly population growth will be the primary driver of the demand for newly built housing.  While most of the population growth will take place among the elderly, that increase, for the most part, does not represent people active in the housing market. Younger age groups will not experience much population growth, but this is because, among those under 35, large cohorts are replacing other large cohorts – sometimes a bit smaller and sometimes a bit bigger.  But most of the members of these large younger cohorts will enter the housing market for the first time in their 20s and 30s.  They will consume most of the newly built housing.  Here are the details.

The aging of the United States population is dramatically shown in Figure 1.  Between 1970 and 2010, most adult population growth took place in the under 65 age groups.  Starting in 2010, aging baby boomers begin to shift most of the population growth to the over 65 age groups.  Each decade during the past 40 years (the leading edge of the baby boom, those born 1946-1955) has provided the biggest share of population growth of any 10-year age group (lower panel of Table 1 cells highlighted in yellow).  In the 1970s, baby boomers created growth among young adults, gradually shifting the growth to older and older age groups in successive decades.  The dominance of baby boomers in the population growth equation will persist until sometime after 2030 when they begin to reach the end of their lives in large numbers.

Source: Decennial Census data and Census Bureau 2012 Middle Series Population Projections.

Notes: Shaded cells represent largest 10-year cohort in each decade (green) and largest growth (yellow).
Source: Decennial Census counts and 2012 Census Bureau middle series population projections.

Many are quick to conclude that, since population growth drives most of the demand for new housing construction, we must primarily build for the elderly.  The problem with this logic is that elderly population growth does not represent new additions to the population, and most elderly are already housed quite comfortably and show little inclination to move to a different residence. Strong elderly population growth is simply the aging of a large cohort replacing the smaller cohort that came before them - they are not new people entering the housing market.  As I’ve discussed in a previous post, for the remainder of this decade and the next, elderly baby boomers will largely age in place.  Fewer than 4 percent of the population over the age of 65 changed residence in 2012-13.  Over 80 percent of the elderly live in owner-occupied housing.  For those 65+ living in owner-occupied housing, the annual mobility rate is now about 2 percent.

Source: 2013 Current Population Survey, Table 7.

As I mentioned earlier, movers can be thought of as driving the demand for new housing since non-movers by definition stay in their current homes.  While the number of people over age 65 is growing rapidly, given the very low mobility rates of this population the number of movers that are elderly will still be small.  Multiplying the average size of each 10-year age group of adults (upper panel of Table 1) by the average percentage who change residence each year will give the annual number or persons in each age group that are expected to move over the decade.  In the 2000-2010 decade, these movers, or recent occupants, were clearly dominated by young adults age 25-34 (Figure 3).  This cohort does not have the largest population; it is about 5 million less in number compared to the baby boomers age 45-54 in 2010 (upper panel of Table 1). But at over 40 million, its size is substantial.  Having the highest rate of geographic mobility, 25-34 year olds accounted for almost three times as many recent occupants during the 2000-2010 decade as the largest baby boom cohort.  Each year during that decade, persons over the age of 65 averaged only 6.2 percent of total moves (8.5 percent in 2013).  Such low representation of the elderly among movers will persist for the foreseeable future. That share is projected to increase only slightly during the next two decades to an average of about 10 percent in 2020-2030 in spite of the large projected growth in the 65+ population.  Note that these projections likely bias upward the estimates of demand for new market housing by the elderly because the resident population used as a base in the projections include the elderly living in nursing homes and prisons.

Notes: Recent Occupancy numbers = average number of persons in age group during decade x average annual age-specific annual mobility rate.  Number of persons is average of numbers at beginning and end of decade.  Average annual mobility rate is the mean of the age-specific rates at the beginning and end of decade. Projections hold mobility rates constant at 2013 levels.

Source: see Table 1 and Figure 2.

In keeping with their lower mobility rates, older adults are underrepresented in newly built housing.  Households over the age of 65 in 2011 accounted for 22.1 percent of all households, but just 14.4 percent of occupants of units built since 2000 (Figure 4).  Among all owner heads of households, 26.9 percent were over the age of 65, but just 14.7 percent were heads in owner units built since 2000.  However, older households do account for a larger share of heads of households living in new rental units: 13.4 percent of renter heads are elderly, nearly equal to their 13.6 percent share of occupied rental units built since 2000.  This greater parity in representation of the elderly in newer rental units is consistent with the higher mobility rates of older renters compared to older owners.

                                                          

Source: Joint Center tabulations of 2011 American Housing Survey.

As the large baby boom cohorts age into the 65+ age groups, will they increase the share of elderly who live in newer housing?  An increase proportional to their growing share of the adult population (adjusted for their lower mobility rates) is certainly expected.  For example, according to recent Joint Center household projections, the elderly accounted for 23.3 percent of all households in 2014, increasing to 26.4 percent in 2020 and to 31.5 percent in 2030 when all baby boomers are over the age of 65.  If the elderly maintain their share of households living in newer units at current levels, about 20 percent of newly built units in 2030 will be occupied by heads over the age of 65.  But to increase the share of newly built housing occupied by the elderly significantly above that figure, tomorrow’s elderly will need to relocate out of older housing at higher rates than we now observe. 

For the next 15+ years, helping the elderly achieve a better fit with their housing will largely involve initiatives to support aging in place. The need for assisted living facilities and nursing homes will gradually increase as the baby boom ages, but the greatest increases will take place after 2030. Whether the elderly are likely to increase their mobility rates within market housing in the near-term future is worth considering.  Public and private efforts to provide housing that better serves the needs of an aging population could spur greater mobility among those ages 65+.  However, there are a host of demographic, social and economic characteristics of baby boomers that argue for less, not more, geographic mobility among the next generation of elderly. This topic will be the subject of a future blog post.   

Energy Cost Burdens in Rental Housing

by Michael Carliner
Fellow

The recent Joint Center report, America's Rental Housing: Evolving Markets and Needs, reiterates the extent of severe cost burdens faced by renters, especially those with low incomes.  A research brief I prepared in connection with the report documents the large share of the cost of rental housing attributable to the cost of energy, particularly for low-income renters.

Among renters who pay for all utilities, payments for energy represented a median of 13 percent of gross rents (rent plus utilities).  Energy expenses are nearly as high for low-income renters as for high-income renters, and consequently account for larger share of gross rents and of incomes for those with low incomes. Median monthly energy expense for those paying all utilities in 2011 was $116 for those with annual incomes of less than $15,000, compared to $151 for renter households with incomes over $75,000 (Figure 1).  This partly reflects the fact that energy use is a necessity, but it is also due to lower energy efficiency in the housing occupied by low-income renters.

(Click chart to enlarge)

Values shown for income, expenses, and energy use are medians
Source: American Housing Survey 2011

About a quarter of renters have some or all of their utilities included in their rent. For those renters, the cost of energy may not be visible, but it represents a major component of the operating cost for their housing, and tenants ultimately pay that cost with their rents.  Even where renters pay directly for energy used within their individual units, energy costs for common areas and facilities are a substantial component of the operating cost for the property and are reflected in rents. Among all multifamily rental properties, payments for energy by property owners represent about 9 percent of rent receipts.

Rental housing generally uses more energy, relative to living area, than owner-occupied housing. Newer homes are generally more energy-efficient than older ones.  Energy use per square foot is particularly high among the nearly 7 million multifamily rentals built before 1960 (Figure 2).  There has been substantial investment in older owner-occupied housing over the years to improve efficiency, but not as much for multifamily rentals.  Older single-family rentals, many of which were owner-occupied in the past, use less energy per square foot than older multifamily rentals, but still use more energy per square foot than owner-occupied single-family homes.

Data in thousands of BTUs
Source: DOE Energy Information Administration, 2009 Residential Energy Consumption Survey

For the majority of renters who directly pay for the energy used in their homes, the amount used reflects the quality of insulation in the structures and on the efficiency of the equipment. Efficiency depends on investments made by the owners of the properties, who may not be motivated to invest in efficiency improvements if they don't pay the bills for usage.  This separation between investment decisions and usage costs has been described as a "split incentive" situation and is a central issue in renters' energy costs. Another type of split incentive arises when the owner pays the bills but the tenant controls the temperature and the lights.

My research brief discusses several policy options for overcoming the split incentive problem where the tenants pay for utilities.  These include regulations mandating energy efficiency and subsidies for investments in efficiency.  The most promising approach, however, may be to make energy efficiency more transparent, so that renters can easily anticipate energy cost in choosing where to live.  If that makes occupancy rates and rental income more dependent on efficiency, property owners would have a greater incentive to invest in efficiency.  Several localities have recently established requirements for benchmarking and disclosing energy expenses in rental properties, providing a test of whether that will lead to an easing of renters' energy cost burdens.

Split incentive problems are not the only source of energy inefficiency and excessive energy cost burdens in rental housing.  The research reported in the brief, and earlier research cited there, indicates that in rental properties with utilities included in the rent, where the owner has a greater incentive to invest in efficiency, insulation quality and equipment efficiency is not consistently better than in rentals where the tenant pays for utilities, once variables such as regional climate and age of the structure are accounted for.  Whether or not utilities are included in the rent, rental housing does not generally include efficiency characteristics comparable to owner-occupied housing.  Other factors are evidently also involved.  The paper suggests, for example, that the financial resources of rental property owners may be a constraint.  Moreover, government programs such as the DOE Weatherization Assistance Program are designed in such a way that assistance goes primarily to owner-occupied housing, even though the low-income households that are the intended beneficiaries are mostly renters.

Double Digit Growth in Remodeling Spending Expected Through Mid-Year

by Abbe Will
Research Analyst

The home remodeling market should see strong growth in 2014, according to our latest Leading Indicator of Remodeling Activity (LIRA).  The double-digit gains in annual home improvement spending projected for the first half of the year should moderate some to just under 10 percent by the third quarter.

The ongoing growth that we’ve seen in home prices, housing starts, and existing home sales is also being reflected in home improvement activity. As owners gain more confidence in the housing market, they are likely to undertake home improvements that they have deferred.  However, the strong growth for this cycle may start to ebb a bit beginning around midyear.  By that time, we’ll be approaching the pre-recessionary levels of spending, and with borrowing costs starting to creep back up, growth rates are likely to slow some.  (Click chart to enlarge.)

For more information about the LIRA, including how it is calculated, visit the Joint Center website.

Census Bureau Takes a Small Step in Better Describing the Structure of the Modern Family -- but More Can Be Done

by George Masnick
Fellow

On November 25 the Census Bureau released its latest package of tables describing American families and living arrangements. These tables highlight the growing complexity of living arrangements among children—and the challenges that demographers and housing analysts face in charting changing household composition.

Since 2007 these tables have included a breakdown of family groups that identify couples who were not legally married but were joint parents of at least one minor child in the household.  This change reflects the trend for families to increasingly be started by the birth of a child rather than by marriage. Over 85 percent of births to teens are out of wedlock, as are over 60 percent of births to 20-24 year olds and over 30 percent of births to 25-29 year olds. Among those in their 20s co-residence of the parents is usually the norm, but in many cases, marriage does not take place for several years, and may never take place, certainly if the couple splits up.  Prior to 2007, these particular family groups were lumped into the category of “other families” with either a male or female reference person as head.  It was impossible under this old definition to distinguish in the tabulated data when unmarried family groups contained joint parents.

Many who referred to the older data assumed (incorrectly) that if adults in such family groups were not “currently married,” then the child or children were living in a “single”-parent household.  The implication was that unmarried two-parent households would behave more like one-parent households than like married couples across a wide range of issues of importance for public policy, including housing consumption.

The magnitude of the numbers of two-parent families under the old and new definitions can be seen in Exhibit 1.  While only about 7 percent of two-parent families are not married, that number is up from 5 percent in 2007. (Click exhibits to enlarge.)

  

Source: Current Population Survey March and annual Social and Economic Supplement, 2012 and earlier, http://www.census.gov/hhes/families/data/families.html. Table FM-2; http://www.census.gov/hhes/families/data/cps2013.html

In 2013 about 76 percent of all parents of minor children were married. Among young adults with minor children, however, the share that is currently married is much lower than this average (Exhibit 2). Only 43 percent of such parents under the age of 25 are married, as are just 65 percent of parents age 25-29.  The higher shares of older parents of minor children that are married reflect both the lower share of births to unmarried women when these parents were younger as well as the tendency for people to marry later. Whether today’s younger cohorts of parents will carry forward higher percentages of unmarried two-parent and “single”-parent living arrangements when they reach middle age remains to be seen.  I have put the word “single” in parentheses because it refers to legal marital status only, and these parents may well be partnered. 

Source: Census Bureau tabulations of 2013 CPS/ASEC  

When the parents of minor children are broken down by race/ethnicity we can see quite a large amount of variability in marriage/living arrangements (Exhibit 3).  The largest discrepancy is between Blacks and Asians.  Only 51 percent of Black parents are currently married compared to 89 percent of Asian parents of minor children. The share of non-Hispanic White parents of minor children who are married is almost 82 percent. Fully 42 percent of Black parents are in “single” parent living arrangements compared to only 9 percent of Asians. We would like to be able to identify the degree to which these differences are accounted for by differences in age of parents and by nativity status, but the data in the Census Bureau’s releases do not allow us to fully do this.  The data are especially silent when attempting to determine the presence of non-parent adults in the “single” parent category.

Source: Census Bureau tabulationsof 2013 CPS/ASEC  

While identifying joint-parent unmarried couples as a separate category is a step forward, especially among parents in their 20s, a further breakdown of the data is still needed to better describe the modern family.  Married couples consist of persons in their first marriage and those who have been remarried.  If we are now identifying unmarried parents that are both the biological parent of at least one minor child in the household, shouldn’t we also identify married couples where only one parent is the biological parent of any child?  Some “single” parents are living with a partner to whom they are not married, who for all intents and purposes are helping to support the family and acting like a parent.  Some “single” parents are living with non-partner adults who also might be playing parental roles.  Many children are in “joint custody” households.  These “blended” and “extended” living arrangements are all very much part of the modern family, but cannot be readily identified in the Census data, especially by age cohort.

The next steps that the Census Bureau can take to present a better picture of the modern family seem straightforward.  Marital status could include a category “remarried,” and married couples should be further broken down by marriages in which one or both partners are remarried. Unmarried parents of minor children could be broken down by those living with a partner and those not. Among those not living with a partner, the presence or absence of other adults could be identified.  Minor children in married couple living arrangements could be identified as the biological child of both parents or as a stepchild of one parent.  And minor children in the household could be identified as living exclusively in the household or regularly spending some of their time in another household.

Generational differences in living arrangements at the onset of family formation, and the extent to which these differences persist as cohorts age, are key descriptors of the modern family. Therefore, many of the CPS tables should provide the age of the reference parent as a variable that is cross tabulated against other variables.  It would also be helpful if these new tables are produced separately by race/Hispanic origin of the reference parent.  This detailed breakdown by age and race/Hispanic origin will stretch the CPS data quite thin, to be sure, but the user can always aggregate up to gain robustness.

Finally, a few comments about the sharp decline since 2007 in Exhibit 1 in the number of two-parent families with minor children. This decline is certainly related to the effects of the Great Recession.  One reason for the decline is that immigration fell sharply in 2006 and has just begun to recover. Immigrant women have higher fertility than native born and experienced the greatest fertility decline during the economic down turn. These are trends consistent with the poor economic conditions that have affected young adults most severely.  Immigrants also have a much higher share of births to married couples compared to native born (76.4 percent versus 61.2 percent), and the decline in immigration during the Great Recession thus contributed to the recent rise in the share of all births that are to unmarried women.

It is normal that during a recession, both marriages and births are postponed.  A recovery in marriages would be expected to lag the recovery in the economy to allow for some planning of the event.  Meanwhile, both the decline and the recovery in births should each lag the trend in the economy by a year or more.  Although year-to-year instability in the CPS series is often the result of simple random variability, perhaps the upturn in 2013 in the number of families with minor children is further evidence that the economic recovery has begun in earnest. 

How American Renters are Being Squeezed...

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