Household Growth and Housing Demand
by Petros S. Sivitanides, Ph.D.
Strong increases in demand within a non-oversupplied, or even better, a supply-constrained market can be the catalyst that will trigger such price increases. Within this context, forces that can trigger increases in housing demand should be of primary interest to residential property investors. Household growth is one of the major forces that drives increases in housing demand; and if such increases occur in a market with low vacancy rate and slowly responding housing supply they will trigger significant value and price increases in the local housing market. The number of households that live in an area can increase through household formation or migration. Household formation is driven by three major forces: - Demographics Demographics determine household formation to a significant extent, as new households are formed at different rates within the various age and income groups. Thus, an increase in the number of an area’s households can occur by simple aging of the existing population, if age groups with higher household-formation rates increase their percentage contribution to the area’s total population (assuming no loss of households due to deaths). Data from the 2000 Census indicates that household formation (as measured by the percent of household heads in each age group) rises sharply from 20% at age 21 to about 50% by age 30. Household formation rates continue rising slowly to 55% by the age of 45, and reach 60% at the age of 65. Obviously, if by the dynamics of deaths, aging, and migration, the number of persons over 30 years old living in an area increases significantly, then, all else being equal, the number of households and demand for housing in that market must increase significantly.
25-34- includes mostly young, married households, with no children, demanding mostly rental housing and smaller, lower-priced, single-family units or apartments (this is referred to as the pre-nest stage of the life cycle) 35-54- encompasses launching and maturing (move-up) families, demanding mostly owner-occupied housing and larger, higher-quality, single-family units, depending on income (this is referred to as the full-nest stage) 55 and older- includes older households, demanding mostly owner-occupied housing and smaller, single-family units, condominiums, or apartments, depending on income (this is referred to as the empty-nest stage) Notice that, based on the above idiosyncrasies of these three groups, we can infer the following dynamics and prospects regarding increases in housing demand: Increases in the age group of 25-34 will trigger increases in demand for smaller rental housing units and smaller low-priced single-family units Increases in the age group of 35-54 will trigger increases in demand for larger, higher-quality, owner-occupied, single-family housing units, and Increases in the number of people over 55 should trigger increases in demand for smaller, owner-occupied, single-family units, condominiums, and apartments.
Data from the US Census Bureau, which describe how homeownership rates change with the age of the household head (see figure below), strongly suggest that increases in the number of persons over 39 years old will boost housing demand and particularly demand for owner-occupied housing. In particular, as of the fourth quarter of 2005, data collected through the Current Population Survey (CPS)/Housing Vacancy Survey (HVS) and published quarterly by the US Bureau of the Census, shows that homeownership rates rise sharply as the age of household head increases (see Figure 23). In particular, homeownership rates start at 25% for household heads below 25 years old and rise sharply to 67% as the age of the household head reaches the 35-39 group. From that point on, homeownership rates rise at a considerably slower rate, stabilizing at 80% as the age of household head reaches 55.
Age-Specific Homeownership Rates as of the
Source: US Census Bureau
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