Real Estate Expert Explains Surprising Housing Market Trends
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The current state of the housing market has defied expectations with prices remaining strong despite surging mortgage rates. This has left many first-time homebuyers puzzled and experts scratching their heads. The unexpected reason? According to one Wall Street economist, we can “blame the boomers” for this phenomenon.
Barclays senior economist Jonathan Millar acknowledges that this may seem paradoxical. After all, one would assume that an aging population would require fewer homes. However, this is not the case. Baby boomers are actually creating more households, putting pressure on housing demand and preventing prices from dropping, even with the highest mortgage rates in over 20 years. Divorce and death are contributing to this trend as boomers separate, leading to an increase in the formation of new households.
Millar notes that while boomers will eventually require fewer homes as they continue to age, this transition will take time. With millions of boomers still in the workforce and set to retire in the coming years, household creation will continue to rise. He points out that while demand from individuals aged 35-44 has increased, the significant spike in households comes from those aged 65-74 and 75+.
While a lack of inventory is also impacting the real estate market, with fewer homeowners listing their properties due to the surge in mortgage rates, household formation remains a crucial driver of housing demand. As young adults move out of their parents’ homes, the number of households gradually rises until it peaks around retirement age and beyond.
Will Housing Prices Decrease?
According to Millar, there is not enough available housing in the U.S. to satisfy the demand from people looking to purchase homes, contributing to the upward pressure on prices. In July, the median sales price for existing homes rose 1.9% to $406,700 compared to the previous year. The increase is even more significant when compared to prices prior to the pandemic, with the median sales price being $266,300 in January 2020.
Millar predicts that housing demand will continue due to the demographics of aging boomers. While new housing construction could help increase supply and potentially slow down price increases, it is likely that real estate prices will continue to rise. He believes that prices will decelerate gradually, with increases of approximately 2.5%. However, if the Federal Reserve cuts rates in 2024, this could lead to more buying activity as cheaper financing would encourage more people to enter the market.
There are differing opinions on this matter, with Capital Economics forecasting weak housing demand in the coming months. While they expect house prices to lose some momentum, they do not anticipate sustained declines and believe that the worst of the correction has passed.
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Furthermore, the formation of new households is also impacted by the parenthood phase during prime age, separation of adult children from the household, divorce, and the possibility of losing a life partner due to death.
04:18
As rent continues to rise, landlords are starting to charge extra fees in addition to the monthly rent. This trend is another factor contributing to the challenging housing market.
In conclusion, the housing market is experiencing surprising trends driven by baby boomers and their increasing household formation. This, coupled with a lack of available housing, is causing prices to remain strong. While some experts anticipate a slowdown, others believe prices will continue to rise. The dynamics of the market will ultimately depend on factors such as interest rates, housing supply, and demographic shifts.
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