America’s aging population is keeping housing prices high, a Wall Street economist warned in a research note titled “Blame the Boomers.”
Homebuyers are currently facing a veritable storm of increased mortgage rates and high property prices, meaning properties are now less affordable than they were during the red-hot housing bubble of 2006.
But Jonathan Millar, an economist at Barclays, said the problem was being exacerbated by the number of baby boomers – people aged between 57 and 75 – starting new households either due to retirement, divorce or the death of a spouse. Millar added that this was putting pressure on the already limited housing supply and keeping prices high.
The idea of “homesteading” underlies much of the U.S. real estate landscape and often drives demand.
The term refers to the units of people living in a house that they either rent or own together. For example, most children grow up in a “formation” that includes their family until they leave home to rent with a “formation” of their peers.
Jonathan Millar, an economist at Barclays, said limited housing supply was exacerbated by the number of baby boomers – people aged between 57 and 75 – starting new households either due to divorce or the death of their spouse
Homebuyers are currently facing a veritable storm of increased mortgage rates and high property prices, meaning properties are now less affordable than they were during the red-hot housing bubble of 2006
However, Millar explained that there is a rise in baby boomers starting new homes – even though they are not yet old enough to actually release properties.
People of retirement age – 65 or older – now make up 16.5 percent of the population, compared to 13 percent in 2010.
He wrote: “The U.S. housing sector is back on the rise, even as mortgage rates are at their highest levels in several decades.”
“Although much has been attributed to the shortage of existing properties and mortgage lock-in effects, we believe the strong demand is a symptom of the aging population.”
He added that the assumption is that older owners are not driving changes in household formation.
“While it is probably true that older people tend to prefer smaller housing units, it is not true that an older population requires fewer housing units,” he wrote.
“In our view, this upward pressure on household formation is increasing demand for housing units and helping to drive up both prices and construction activity.”
The real estate market has entered a stalemate as most homebuyers locked in mortgage interest rates when they were between 2 and 3 percent.
But interest rates have more than doubled since then, with the average deal on a 30-year mortgage topping 7 percent, according to government-backed lender Freddie Mac.
Loans have been driven higher by the Federal Reserve’s aggressive campaign to raise interest rates to a 22-year high to curb rampant inflation.
That means a homeowner with a home worth $400,000 will now face a monthly mortgage payment of $2,559.
However, if they had set the rates in September 2021 — when rates were around 3 percent — their monthly payments would have been nearly $1,000 cheaper, at $1,602.
According to data compiled by Freddie Mac, interest rates have not reached 8 percent since 2000
This analysis assumes they make a 5 percent down payment and sign for 30 years at the current average interest rate of 7.12 percent.
It has led to a “lock-in” effect, with households refusing to move to avoid higher mortgages – restricting the country’s already limited supply of housing and keeping prices high.
A recent Freddie Mac survey found that 82 percent of home buyers felt “trapped” in their home. And one in seven homeowners who don’t plan to sell their home cite the current low interest rate as the main reason for staying.
According to the National Association of Realtors, the average sales price for existing homes rose 1.9 percent to $406,700 in July compared to a year ago.
Millar predicted that demand for housing would likely continue to rise and that any rate cuts would only add fuel to the fire.
“Given the overall housing shortage likely to prevail, we expect risks to our forecasts for both home prices and rents to be tilted to the upside, particularly as the Fed enters its tightening cycle in late 2024,” he wrote.