Tuesday, February 17, 2015

What Will Happen to Housing When the Baby Boomers are Gone?

by George Masnick
Senior Research Fellow
As baby boomers age and die, adult population growth will begin to fall off sharply in the coming decade. Though this decline will have a dampening effect on household growth, it will occur over several decades and much may be offset by the millennial generation beginning households of their own. Even when baby boomers do release housing back into the market, it may not be suitable for, or desired by, younger occupants, so despite slower adult population growth in the future, demand for newly built housing will persist.

According to recent Census Bureau population projections, adult population growth will start turning sharply downward later this decade (Figure 1). After increasing by close to 2.5 million each year for more than a decade, growth in the population age 20 and older will steadily decline to about 1.5 million per year by 2050, a 40 percent drop. 

Source: 2014 Census Bureau population projections 

Despite their improving life expectancies, the oldest baby boomers will soon turn 70, and begin to die off in ever-greater numbers. Today, there are about 2.6 million deaths every year, but this number will rise to over 4 million a year by 2050. Meanwhile, births are also projected to increase over the same time period, but only by about 500,000. Consequently, the rate of natural increase (births minus deaths) is projected to fall dramatically (Figure 2). Today, population growth is about evenly distributed between migration from abroad and natural increase. Under the new Census Bureau assumptions, natural increase will fall to half the level of growth from immigration by 2035, and further decline to about one third by 2050.

Source: Census Bureau 2014 population projections 

Adult population growth has generally been the primary driver of household growth in the U.S. For most years since 1990, there have been roughly 2.5 million more adults over the age of 20 compared to the year before. This growth came from the aging of those born in the U.S. 20+ years ago, as well as immigration during the past two and a half decades. On average, almost half of all persons over the age of 20 head an independent household. Therefore, the adult population growth we’ve seen over the past 25 years alone would account for annual household growth of about 1.2 million.

Actual annual household growth was either above or below 1.2 million because of shifts in the age structure of the adult population, and because of changes in age-specific rates of household formation (headship) linked to social, demographic, and economic changes. These latter changes include trends in marital status and fertility, minority composition and nativity, and employment and income, to name the most important. 

Age structure changes have had a positive effect on household growth as aging baby boomers inflated successive age groups that have higher headship rates. For example, the oldest boomers were age 35-44 in 1990, 45-54 in 2000 and 55-64 in 2010. As they aged, the share heading an independent household increased from 53.4 percent in 1990, 56.1 percent in 2000, and 58.5 percent in 2010. On the other hand, recent social, demographic, and economic trends have generally had a negative effect on age-specific rates of household formation, particularly in the younger age groups. Higher minority shares and delayed marriage have had a negative effect on headship rates, as has the Great Recession’s impact on employment and income. It is important to note, however, that not only have the effects of population aging and the broad demographic trends affecting headship rates tended to cancel each other out, but each has been small compared to that of adult population growth, numbering in the low hundreds of thousands annual net household growth or decline (Figure 3).

Source: Joint Center calculations using 1990, 2000 and 2010 decennial census data

Projected declining adult population growth because of increasing deaths will have several effects on housing markets, mentioned below. But it will not have an immediate and proportional impact on household growth for a variety of reasons. First, many initial baby boomer deaths will occur to married couples, leaving the surviving spouse to continue to head a household. Many deaths will also occur to people who do not head a household, but rather live in a household headed by children or other relatives, or in institutional settings (assisted living or nursing facilities). Declining household growth because of increased household dissolutions among the elderly will be spread out over many decades. Furthermore, when dying baby boomers do begin to have a larger impact on total net household growth, aging millennials could cause the changing age structure effect to be more positive, similar to what baby boomers exerted as they passed into middle age, offsetting the effects of declining adult population growth. It is also entirely possible that a fuller recovery from the Great Recession will reverse the fall in headship rates, further offsetting any effect of slower adult population growth. 

When we reach a point where baby boomers are releasing housing in greater numbers back to the market, however, we still cannot assume that it will proportionately reduce the demand for newly built housing to accommodate young adults. Many homes vacated by aging seniors will not be in demand by tomorrow’s young adults, being in the wrong part of the country or otherwise unsuitable (age restricted communities, for example). Some will be simply too expensive. Some “affordable” vacated homes in desirable locations will be torn down and replaced by larger and more energy efficient / amenity rich houses targeted to older buyers.  Many houses will sit on the market for long periods of time before sellers are willing to recognize that they are overpriced. Some homes in declining communities will become abandoned.

In short, while the housing market does somewhat resemble a game of musical chairs, with successive age groups “moving up” as their incomes and families grow, and older households exiting, this process can be inefficient for young adults moving into units vacated by baby boomers because of the reasons discussed. In addition, the majority of baby boom household dissolutions will not take place until after 2030. It will not be until 2060 or later that the last of the baby boomers, born in the early 1960s, will die. Between now and 2030, new construction will still be needed to meet the housing demand from the large cohorts under the age of 30 that are currently in the pipeline, and which will be further inflated by any future immigration. Where that housing will be located and what it will look like is far less certain.  

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