The housing market in New York has surprised many by remaining robust despite a surge in mortgage rates this year that experts predicted would lead to a downturn in real estate prices. One Wall Street economist, Jonathan Millar of Barclays, suggests an unexpected culprit for this trend: the baby boomer generation.
Millar’s research report acknowledges the apparent paradox of an aging population contributing to increased housing demand. Typically, one might assume that as people age, they would require fewer homes. However, this is not the case. Baby boomers are actually forming more households, which is putting pressure on housing demand and keeping prices high, even in the face of the highest mortgage rates in over two decades.
This phenomenon is occurring because as people age, they are more likely to become the head of their own households, particularly beyond retirement age. As the population shifts into older age groups, more households tend to be created. While boomers will eventually require fewer homes as they get older, this transition may not happen for quite some time. Many boomers are still in the workforce, and as they retire over the next several years, this will continue to drive household creation.
Millar’s analysis reveals that despite some increased demand from the 35-44 age group, most of the additional demand is explained by the aging population, with significant increases in households among those aged 65-74 and 75 and older.
It’s important to note that other factors are also affecting the real estate market, such as a lack of available housing inventory. Due to the surge in mortgage rates this year, fewer homeowners are putting their properties on the market, fearing they’ll have to purchase a new home at much higher interest rates. This shortage of available homes is intensifying competition among buyers, driving prices upward.
The term “household formation” is central to understanding this dynamic. It refers to the creation of new households when an individual who has been living with others moves out and becomes the head of a new household. Household formation tends to rise with age, peaking around retirement age and beyond. This is influenced by factors like young adults leaving their parents’ homes, the separation of adult children from their parents’ households, divorce, and the possibility of losing a partner due to death.
Given the shortage of available housing in the U.S. and the demographic trend of aging boomers, housing demand is likely to persist. While increased construction of new housing could help alleviate the supply shortage and slow price increases, real estate prices are expected to continue inching upward. Millar predicts a slow deceleration in price increases, with potential for a boost in buying if the Federal Reserve cuts interest rates in 2024, making financing more affordable.
However, it’s worth noting that not everyone agrees with Millar’s assessment. Capital Economics forecasts weaker housing demand in the coming months due to affordability concerns and a slowing economy. They expect some moderation in house prices but do not anticipate significant, sustained declines.