Tuesday, October 11, 2016

Demographics: Renting vs. Owning

by Bill McBride on 10/11/2016 02:03:00 PM

Note; This is an update to a post I wrote last year.

It was more than six years ago that we started discussing the turnaround for apartments. Then, in January 2011, I attended the NMHC Apartment Strategies Conference in Palm Springs, and the atmosphere was very positive.

The drivers in 2011 were 1) very low new supply, and 2) strong demand (favorable demographics, and people moving from owning to renting).

The move "from owning to renting" is probably over, and demographics for apartments are still somewhat positive - but less favorable than 6 years ago.  Also much more supply has come online.  Slowing demand and more supply for apartments is why I think growth in multi-family starts will slow this year (or maybe be flat compared to 2015).

On demographics, a large cohort had been moving into the 20 to 29 year old age group (a key age group for renters).  Going forward, a large cohort will be moving into the 30 to 39 age group (a key for ownership).

Note: Household formation would be a better measure than population, but reliable data for households is released with a long lag.

Population 20 to 34 years oldClick on graph for larger image.

This graph shows the longer term trend for three key age groups: 20 to 29, 25 to 34, and 30 to 39 (the groups overlap).

This graph is from 1990 to 2060 (all data from BLS: current to 2060 is projected).

We can see the surge in the 20 to 29 age group (red).  Once this group exceeded the peak in earlier periods, there was an increase in apartment construction.  This age group will peak in 2018 (until the 2030s), and the 25 to 34 age group (orange, dashed) will peak in 2023.  This suggests demand for apartments will soften in a few years.

For buying, the 30 to 39 age group (blue) is important (note: see Demographics and Behavior for some reasons for changing behavior).  The population in this age group is increasing, and will increase significantly over the next decade.  

This demographics is positive for home buying, and this is a key reason I expect single family housing starts to continue to increase in coming years.