Demographics shape housing market

David S. Dahl | Regional Economist

Published October 1, 1994  | October 1994 issue

"Any attempt to anticipate tomorrow has to start with demographic analysis as the sturdiest and most reliable foundation." Peter Drucker, Management, 1973

Discussions about housing often focus on short-run fluctuations such as mortgage interest rates and consumer income, but to fully understand the housing industry, the strong influence of demographics must also be considered. People—their number, characteristics and family arrangements—provide the foundation for comprehending and anticipating trends in home building.

Changes in adult population drive housing

Adults, those age 18 and over, form the households that occupy homes. Therefore, changes in the adult population and its composition are the starting point for discerning trends in housing. During the last three decades, the "baby boom," those born between 1946 and 1964, dominated adult population growth.

As is evident in all Ninth District states, adult population growth jumped sharply in the 1970s as the bulk of the baby boomers entered adulthood, and then declined in the 1980s when the baby bust, those born between 1965 and 1975, started turning 18. Consequently, those 35- to 64-year-olds were the fastest growing segment of the adult population in the 1980s and early 1990s. Moreover, people are living longer, and during the last 30 years those age 65 and over increased steadily in district states.

Since the people who will enter adulthood in the next few years have already been born, housing analysts can glean how future trends in adult population growth are likely to affect housing markets. The population will continue to age, and shortly after the turn of the century baby boomers will start turning 65. But adult population growth will get a boost in the 1990s, when the children of the baby boomers, the baby boom echo, begin entering adulthood.

People move, however, complicating future projections of adult population, and migration is an important influence in state population growth. Net migration is the difference between an area's total population change and its natural population change (births minus deaths). Positive numbers indicate that more people moved into the area; negative numbers mean more people left.

Relative to a state's overall population, net migration has had a much larger impact on the less populous Dakotas and Montana than on Minnesota and Wisconsin, which have about five times the population. In the 1960s negative net migration, for example, held down adult population growth in Montana and the Dakotas. But in early 1990s, net migration has been positive in Montana and South Dakota, and they experienced a sharp pickup in their adult population growth. In North Dakota net migration remained negative, and adult population growth did not climb in the early 1990s.

In Montana and South Dakota, recent in-migration levels demonstrate how a state's economic conditions can be linked to population. Workers had an incentive to move to both states, for between 1990 and 1993 their unemployment rates were below the nation's. In Montana and South Dakota job growth was well above the nation's and they experienced substantial in-migration. Montana in-migration also can be attributed to western Montana's participation in the nationwide phenomenon of in-migration to scenic recreational areas.

Looking ahead, migration will be the wild card. Adult population growth could be stronger than changes in the age structure of the region's population alone indicate, if district states' economies remain dynamic and attract new residents.

Adults form households

The first link in relating changes to adult population to home building is to connect adult population to households. A household is an individual, a family or any other group who regularly occupies a housing unit, and "the household is the basic unit of currency determining the vitality of housing demand," according to Rutgers University housing economists James Hughes and George Sternlieb.

Clearly, in all district states the jump in households in the 1970s mirrored the increase in adult population as baby boomers entered adulthood, and in the 1980s the growth in households receded along with adult population growth.

However, in the 1980s, the growth in households did not fall off as much as the growth in adult population. This countervailing trend is attributed to a rising rate of household formation, i.e., more households generated from a given number of people of specific ages. Such factors as a fall in marriage rates and an increase in divorces decrease the tendency for adults to get together and form a household. Consequently, in all district states the number of persons per household has fallen.

But between 1990 and 1993, the difficulty many people experienced retaining jobs appears to have at least temporarily arrested the decline in persons per household in district states.

Changes in households linked to home building

Because households occupy housing units, the net change in households is a good predictor of housing unit authorizations, that is, building permits issued for housing units.

However, several factors keep changes in one from matching changes in the other. The change in households may be greater than housing units authorized if vacant housing units or mobile homes are used to satisfy increases in housing demand. Conversely, housing unit authorizations may exceed the change in households if some new housing units are second homes or if some of the increase in home building offsets the demolition of housing units.

Nevertheless, net change in households and housing unit authorizations tend to move together. In all Ninth District states housing unit authorizations tended to parallel the change in households during the last three decades.

But special factors appear to have caused them to diverge in the early 1990s. Some of the divergence may be due to timing: Housing unit authorizations are not coterminous with housing unit completions. In all district states, except Montana, housing unit authorizations exceeded the change in households, as low interest rates and accompanying increase in affordability spurred housing construction. In Montana, which is experiencing substantial in-migration, housing demand appears to be outpacing housing supply.

Demographics also provides some insight into the type of housing units constructed. The percent of single-family units constructed has been increasing in Minnesota, Montana and South Dakota. Economic factors and tax changes have influenced this increase, but demographics undoubtedly has some role, for as people age they can more likely afford single-family housing. However, the percent of single-family units constructed has been relatively constant in North Dakota and Wisconsin.

Also, since the early 1980s in all district states the value of a single-family building permit has increased markedly. This trend in part reflects the movement of the baby boom generation into higher income brackets as they are maturing into their middle years.