June 5, 2023 US Housing Demand: Tailwinds Turning into Headwinds

Housing value chain suppliers leverage demography for accurate long-term housing forecasts.

By Kevin Swift, Senior Economist for Global Chemicals, ICIS

Despite facing an array of frictions, the construction industry remains cautiously optimistic about short-term growth, as high interest rates causing a lack of existing home seller supply are sending buyers toward new builds. After 11 straight months of declines, single-family permits rose in February, and in by April 3.1%. Demand is the x-factor that housing can hang its hat on: The U.S. housing shortage is estimated to exceed 3.5 million units.

While housing market health is highly dependent on supply chain shortages and rising costs, those suppliers’ businesses are likewise dependent on the housing market for their long-term viability. Housing is an important end-use market for raw materials like oil, lumber, and steel, as well as plastics and other chemistries like paints, sealants, and roofing materials. New housing also generates demand for sales of appliances, carpet, and window treatments.

Leaders in housing value chain industries make investment decisions based on the economic viability of a production facility which has a long operating life, often 30 years or so. In today’s atmosphere of continuous crises and uncertainty, forecasters can find a measure of certainty from leveraging demography to peer into the future of the residential housing market.

Forecasting long-tail residential housing demand

Aside from house prices and mortgage interest rates, economists also consider the inventory of homes for sale, over- or under-building in recent years, consumer confidence, mortgage credit availability, home builder confidence, the pool of first-time buyers, and government policy. However, short-term forecasting is only a small piece of mastering market dynamics to mitigate risk and make sustainable business decisions. The need for vacancies, the desire for second homes, and demography all drive housing demand over extended time periods. Most factors determining long-term housing demand are slow-moving variables, so one must zoom out to see the patterns. Several variables inform long-term demand for housing, but ‘net household’ — defined as an occupied dwelling unit — is the key metric.

Calculating net household growth to predict housing demand

With demography, one can appraise a population’s housing demand 20-years out at any given time, and changes tend to be gradual. The factor determining new net additions to the housing stock largely mirror those determining net household formation. The net increase in family and non-family households depends on the size and age of the population as well as marriageable ages, family size, and other social/cultural factors. Changes in the number of families owning two or more residences is another factor causing housing demand to deviate from net household formations. 

Analysts can lean heavily into the typical age of first-time home buyers as an effective metric for forecasting the coming decades. The growth of households exploded in the 1970s as the Baby Boomers came of age. For the Millennial generation, the largest living US cohort, the average age of first-time buyers is over 30 years. The youngest of that generation are now entering the prime first-time home buying age, bringing powerful tailwinds to new housing demand.

Generational demographics dictate housing demand

We can safely assume that Gen Z and “Generation Alpha” (born after 2012) will follow this pattern of first-time home buyers in the 30–34 age group. However, these cohorts are much smaller in both absolute and relative terms compared to their predecessors. When Gen Z reaches the 30–34 age around 2030, the population in that demographic will fall until after 2040.

In the 2020s, underlying demographic and other trends suggest average annual housing starts of 1.52 million per year. As the smaller Gen Z matures, starts will ease to an average of 1.20 million per year in the 2030s and then 1.15 million per year in the 2040s. Business leaders in industries supplying products to this market should be prepared for market headwinds. However, babies are still being born for Generation Alpha, a larger cohort than their Gen Z older siblings that may or may not rise to Millennial numbers. At minimum, we will see stabilizing forces and possibly a return to higher housing activity.

Demography is destiny in housing

For the period approaching 2050 we assume that vacancies will return to their long-term average and that increasing wealth will foster demand for second homes. Replacement demand will edge up due to an older housing stock. Demography is a factor that can be predicted to a good degree of certainty, an indispensable mechanism to assess long-term US housing demand. The 19th century French philosopher Auguste Comte reportedly said, “Demographics is destiny.” In the case of housing, perhaps demography is not 100% of the equation, but it is the key driver for the long-term forecasting.

Dr. Kevin Swift is senior economist for global chemicals at ICIS where he is responsible for quarterly thought pieces addressing key market dynamics and is demand advisor for long-term supply demand balances. He joined ICIS after retiring as chief economist at the American Chemistry Council. Prior to joining ACC, Dr. Swift was vice president of research at The Freedonia Group and director of research at Predicasts, where he started as an economist. He started his career at Dow Chemical. Dr. Swift is a Fellow and former president of the National Association for Business Economics and a member of the Harvard Discussion Group of Industrial Economists and National Business Economics Issues Council.

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