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Baby Boomers, Less Homeownership Supports Apartment Markets

Baby Boomers, Less Homeownership Supports Apartment Markets

The apartment business is depending on strong demographics and stronger demand to keep absorbing the hundreds of thousands of apartments still planned to open this year.

“In 2014, apartment rents grew 4.6 percent despite a fairly good amount of supply,” says K.C. Sanjay, senior economist for data firm Axiometrics. “The reason for this is the job growth, right above 200,000 new jobs a month, and rental household formation.”

That’s sounds like a solid foundation for strong demand for apartments. But a close look at the demographics shows a few odds twists and turns in the data. The growing number of U.S. households turns out to be largely due to an aging population, not young Millennials with new jobs, according to a recent report by the Terner Center for Housing Innovation at the University of California at Berkeley. Also, an unusually low rate of homeownership is driving people to rental housing—but that can’t last forever, reports Axiometrics.

Homeownership low… for now

“The homeownership rate is still declining—that was a surprise,” says Sanjay. “This year the homeownership rate will bottom.” He expects the balance between homeownership and rental housing to move back towards a more normal relationship in 2016 and 2017. “We can’t expect single-family to always be slow and suppressed.”

Potential increases to homeownership rates is one reason why rental housing will only capture a fraction of the huge increase in households over the next few years. By 2024, demographic and economic changes will bring what could be one of the largest expansions in the history of the U.S. housing market—15.9 million additional households, according to a recent report by the Mortgage Bankers Association (MBA).

By 2024, there will be 31 million more renter-occupied households, according to MBA. Baby boomers will drive that increase, with 33 million more renter households in 2024 headed by someone 60 or older than there are today. Millennials will contribute, but far less than in recent years, bringing a total of just 700,000 additional renter households headed by someone aged 18 to 44. Generation X will actually take a few households out of the rental market, partly as some move into homeownership. The number of renter households age 45 to 60 will decline by 900,000, according to the MBA report.

Baby boomers—not Millennials—are also responsible for much of the recent increase in household formation. As the boomers get older, they are more likely to live in smaller households. “The recent gain in household formation appears to be due to basic demographic shifts rather than the economic cycle,” according to the U.C. Berkeley report.

Young people still living at home

Even though the economy is now stronger, more young people are living with their parents than ever before. In 2014, there were 6.2 million adults aged 25 to 34 were the children of the heads of their households—that’s 14.7 percent. That’s up from 4.3 million or 10.8 percent in 2005, before the Recession, according to data from the U.S. Census.

An optimist might hope that the extra 2 million young people living at home might suddenly move into their own apartments, especially now that so many of them have jobs. Unemployment dropped from 7.7 percent in 2014 from 12.4 percent in 2010 for young adults aged 18 to 34.

“The glass-half-empty view is that the drop in headship rates among young adults is not a lingering yet ultimately temporary effect of recession but, rather, a new, lower normal, thanks to rising housing costs, later marriages, and not-good-enough jobs,” according to the U.C. Berkeley report.

But the arrested development of some young people is also helping the apartment business. That’s because many young renters are staying in their apartments longer as they wait to couple up and have children. Apartment resident retention when existing leases expire is now at 51 to 52 percent, well above the historical average, according to MPF Research Inc., a division of Real Page Inc.

“Typical unit churn just isn’t there, as so few of the existing residents are leaving out the back door to purchase single-family homes,” says Greg Willett, chief economist for Real Page.

While economists pick apartment the data on demographics, apartment developers continue to build new apartments. “The specter of impending new supply putting upward pressure on vacancy rate remains a concern, but it is important to keep in mind that vacancies are still at very low levels,” says Michael Steinberg, associate of research and economics for Reis Inc.

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