There is broad agreement that the US housing market needs more homes. There is also broad agreement that affordability needs to improve. But it doesn't necessarily follow that we should build more affordable homes.
Stepping up housing production is a multiyear process, which means we should be thinking about what the market will look like in 2030, not what it looks like now. By then, middle-aged millennials in America’s largest generation will be at their peak earning potential, seeking luxury digs or to trade up rather than entry-level or affordable homes. Understanding and catering to these changing needs will ensure the right kind of supply and, counterintuitively perhaps, improve overall affordability.
The starting point is recognizing the age cohort that dominates over time and anticipating their demands. Bill McBride of the Calculated Risk blog tracks these shifts. He pointed out last year that the biggest share of millennials was in their early to mid-20s in 2010, the phase of life when people tend to favor apartment living, and is now in their 30s, the age when people tend to buy entry-level homes.
These millennials have been underserved by residential construction trends this century. The US built a lot of suburban single-family homes in the mid-2000s, not the apartments that appealed to millennials who were just entering the workforce and moving to cities at the time. The 2008 housing bust then led to years of under-construction, followed by a scramble to build the multi-unit housing that developers realized was in high demand. Single-family housing languished with memories of the sub-prime mortgage crisis still fresh.
Now entry-level and affordable single-family homes are in short supply because a decade of under-production has left the market unable to absorb the needs of millennials in their 30s. Developers are once again racing to catch up to that demand, with home sizes shrinking and builders doing their best to fit the budgets of buyers in a high-cost, high-interest-rate environment.
But as we think about the longer term, we should be thinking about what will come next. About 10,000 millennials turn 40 every day — Facebook founder Mark Zuckerberg and basketball superstar LeBron James turn 40 this year. People entering their higher-earning 40s tend to want nicer housing than they did in their 30s.
So what sorts of homes will these 40-somethings want? There is significant intra-generational inequality at play here depending on whether someone bought a home prior to 2022 or not. There are 12 million home-owning households headed by someone in their 30s, according to the Census Bureau, most of whom have locked in significant levels of home equity due to the surge in prices over the past several years. These 35-year-old homeowners are the richest 35-year-olds in history. At the same time, millions of millennials are struggling to get on that ladder, and 35-year-old renters are facing the worst time to buy a home in four decades.
By the time we get to 2030, the two largest age cohorts of the US population will be 35 to 39 and 40 to 44. The part of the housing market with the most acute shortage will be the luxury and trade-up homes demanded by high-earning millennials who were lucky enough to buy a starter house prior to 2022. That’s the segment to start building for now. As this fortunate group sells the homes they never intended to live in forever, they will free up entry-level inventory for younger people who are currently frustrated by a lack of affordable choices.
Focusing on affordable housing sounds good today — after all, that’s the shortage here and now — but means again having the wrong mix of housing as millennials age. In that world, prices for higher-end residences would surge while prices at the entry level stagnate, trapping millennials who want to sell and move.
And as my Bloomberg Opinion colleague Matthew Yglesias recently pointed out, the most popular options to address affordability are economically “basically all nonsense,” including rent control, government subsidies for down payments, property tax cuts and restricting institutional buying.
"If you push subsidies into a supply-constrained market, prices will go up in response, and you’ll be left right where you started. If you impose rent control, it will help incumbent renters who never plan to move, but it only serves to exacerbate scarcity."
On the other hand, we know filtering works in the apartment market. In the Sun Belt, where the most apartments have been built recently, rents in older Class B apartments have slumped more than rents in new, higher-end Class A apartments. The same would likely hold true in the for-sale market. Building more luxury housing is the best way to meet future millennial demand while also holding prices for entry-level housing in check.
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