‘Blame the Boomers’ – A paradox in the housing market is what’s really behind rising demand and home prices – DIGIWIZ CENTRAL

‘Blame the Boomers’ – A paradox in the housing market is what’s really behind rising demand and home prices

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High mortgage rates and short supply of housing are just part of the pricing story, according to Barclays.
Strong demand among older Americans is keeping prices high, with analysts saying “Blame the Boomers.”
That’s as older age groups tend to spur more household formation, adding pressure on the market.

There’s a paradox in the housing market that explains what’s really driving demand and home prices higher, according to Barclays.

Despite a brief drop in home prices late last year, valuations have been rebounding since the first quarter. As prices keep climbing, the housing market has fallen into the grips of an affordability crisis and middle income buyers have been increasingly locked out. 

Standard explanations place responsibility on high mortgage rates, which have discouraged homeowners with lower rates from  selling. This has kept inventory tight in an already supply-starved market, forcing buyers to bid higher on the few homes available.

But Barclays analysts said that alone doesn’t explain the surge in home pricing. According to their note, titled “Blame the Boomers,” the aging of America is spurring more household formation.

“This may strike some as paradoxical, as many associate demand for housing units with rates of increase in population,” analysts said, adding: “Is it not true that an older population requires less housing? While it is likely true that older people tend to prefer smaller housing units, it is not true that an older population requires fewer housing units.”  

Barclays Plc

Barclays explained that when the head of a given household gets older, the size of the household gets smaller in terms of people, as children move out and couples separate due to divorce or death. That’s how more households are created as the population skews older.

And as there’s increasingly more older Americans, housing demand is being pushed higher, fueling price gains in for homes, Barclays wrote.

“Despite notable increases in demand from the 35-44 cohort, almost all of additional demand is explained by the aging population, with significant increases in households in the 65-74 and 75+ groups,” analysts said. “All told, our estimates place the underlying pace of new household formation across all age cohorts at around 1.3mn units.”

With less than half of boomers having entered retirement in 2020, this trend won’t ease anytime soon. Barclays expects the imbalance between excessive demand and lacking supply to extend into the medium term, with a scarcity of construction labor and higher borrowing rates adding to the pressure.

However, the added demand has helped spur more construction, which will further accelerate once the Fed begins cutting interest rates.

Still, added housing construction will only slightly ease the inventory shortage — prices are unlikely to come in line with inflation until the fourth quarter of 2024.  

“With overall housing shortages likely to prevail, we think risks to our forecasts for both housing prices and rents are to the upside, especially as the Fed enters its cutting cycle in late 2024,” Barclays said.

Read the original article on Business Insider
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