The is the third article in our “Debunking the Housing Crash” series.
COVID-19 is one of the most deflationary global events to hit the earth since the meteor that took out the dinosaurs. When much of the United States and many other countries began enforcing stay-at-home orders, the economies of the world came to a grinding halt.
How is it then, that a deflationary event of this magnitude could not trigger a housing crash in the U.S.?
As deflationary of an event as COVID-19 has been globally, there are equal and potentially greater inflationary pressures currently pushing U.S. housing prices higher than they are today.
This series explores each of these pressures in detail.
Reason #3: Demographics Are Changing
On January 22, 1973 the United States Supreme Court affirmed the legality of a woman’s right to have an abortion under the Fourteenth Amendment of the Constitution in the landmark case of Roe v. Wade.
This ruling may seem irrelevant to the real estate and housing market today, but if you study the delayed impact of this court decision and its related social behavioral changes you will find some shocking data.
According to the National Association of Realtors, the average American homeowner purchases their first home at the age of 33. Not coincidentally, the peak of U.S. household formations was in 2006 at the height of the real estate bubble and exactly 33 years after Roe v. Wade.
Was the legalization of abortion fully to blame for the Great Recession? Absolutely not, but it did contribute to a demographic shift that very few saw coming.
Before 2006, household formations had been on the rise and a seemingly endless supply of new home buyers were entering the market. This sea of buyers conveyed to homebuilders and mortgage lenders that demand for housing would be permanent and investment in land development, home construction, and loosely underwritten mortgages would all be safe investments.
We all know what happened when the demographic tide shifted at the peak of this speculation and greed from real estate investors, home builders, and mortgage banks alike – the real estate market plummeted and home prices did not recover until 2012 (the year which also happened to be the bottom of the household formation dip caused by the ruling in Roe v. Wade).
Beyond the fascinating correlation of Roe v. Wade to the housing bubble and eventual crash, this data is relevant to current and future real estate markets and home values. What’s important for us to pay attention to is in the years following 2012, household formations took off and quickly eclipsed previous numbers.
Household formations have exceeded the number of annual completions of housing units (new home construction) every year since 2015. This is the primary reason we do not have enough housing inventory to meet demand today. Demographics shifted towards higher household formation growth and the builder community has not been able to keep pace.
COVID-19 is further exacerbating the issue as many expect the stay-at-home orders to lead to a baby-boom that will drive families out of rentals and into home ownership.
This anticipated spike in demand for homes also comes at a time when COVID-19 has also deeply impaired the number of housing starts (new construction homes) being built.
Take a look at the far right of the chart below and note the drop in housing starts in 2020. The number of new housing starts now looks to be headed back toward 800,000, which is near the lowest levels we’ve seen since 1960 when household formations were much lower.
Additionally, in the graph below we can see a substantial dip in the number of people turning 33 years old (which is the median age of first-time home buyers) from 2006 to 2012.
By following the U.S.-birth chart below, we can see the population of 33 year olds today (people born in 1987) is surging and anticipated to bring more first-time buyers to the market over the next four years.
After the 1990 birth rate peak, we see a mild pullback in birth rate but with numbers still elevated near 4 million – significantly higher than the depressed levels following the impact of Roe v. Wade which were just above 3 million. This indicates we have another 4 years of significantly improving demographics and higher demand from first time homebuyers.
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