Just some Friday food for thought on the housing outlook. A new report out of the Federal Reserve Bank of Kansas City (PDF) takes an interesting look at housing starts based on demographic shifts. Economist and author of the report, Jordan Rappaport, writes that “the longer term outlook is especially positive for multifamily construction, reflecting the aging of the baby boomers and an associated shift in demand from single-family to multifamily housing.” He does detailed projections of the population, household formation, and occupied housing units to arrive at his outlook and it’s pretty interesting, given where a lot of the major macroeconomic forecasters are at. The graphs below show the KC Fed papers three scenarios — baseline, optimistic and pessimistic — along with IHS Economics’ (formerly Global Insight) baseline for comparison purposes.
The first thing I noticed was the strength of the KC Fed projections, which are generally much stronger than the IHS outlook, or a similar national consensus forecast. Second, is the composition of the outlook, with single family more or less returning to levels seen during the 1990s but multifamily nearly doubling anything we have seen in recent history. In general, I think most economists and housing experts are on board with stronger multifamily moving forward (it will be a larger share of overall construction) but these new projections are just really strong. What was interesting to me is that Mr. Rappaport expects a lot of this shift to be demographic driven by the Baby Boomers. It is not just the Millenials who may prefer to live in a higher density area, but also the empty nest Boomers switching from single family to multifamily.
In conclusion, Mr Rappaport has the following to say, based on his projections:
- While the housing rebound will continue in the short-term, demographics will drive the intermediate and longer run
- Slowing population growth will put significant downward pressure on both types of construction
- But aging will put more downward pressure on single-family and upward pressure on multifamily
- Shift into multifamily may cause geographic shift from suburbs to city living
- For cities, this offers possibility of revitalization and shoring up public finances
- However, cities will need to make sure to offer urban amenities
- Suburbs seeking to retain households may need to re-create a range of these urban amenities
- This projected shift will likely have many, large long-lasting effects on US economy
- It will put downward pressure on single-family prices relative to multifamily
- It will shift consumer demand away from goods and services that complement large indoor space and a backyard toward goods and services more oriented toward living in an apartment
Anyway, just some more food for thought.