We are never-ending in our firm’s quest for up-to-the-minute data that we can analyze and then draw conclusions on how that data drives the construction aggregate market, and every now and then, we get tossed a big surprise that we did not expect.
Take a recent, seminal report from a major investment bank that conducted a deep dive into the profile of home buyers; the result was not what you would expect. Any person shopping for a home would naturally conclude that their competition in his tight housing market would be the millennials cohort, or generally the age group born between 1981 and 1996, as they move into higher earning periods in their careers and more capable of financing a new or existing home.
But No. That is not what is actually happening. In a report issued by Barclays Investment Bank, economists point the finger at the aging Baby Boomers as the primary driving force fueling the demand for homes, fueling a market that remains surprisingly resilient. Although much has been attributed to shortages of existing properties and mortgage lock-in effects, the report suggests that strong demand is a symptom of the aging population.
But the most surprising aspect of the report de-bunks the theory that the aging population would require fewer homes, which isn’t quite accurate. It turns out older consumers tend to prefer smaller dwellings, but not fewer homes. The report makes the argument that more Boomers are partly responsible for creating more households, putting pressure on housing demand.
The formation of households is one of the factors that fuels the housing market. It happens when consumers move out on their own, creating a head of a new household, a move that happens as younger adults venture away from college and their parents.
Data shows there is a rise in household formation at the age of 25, which increases steadily and peaks around retirement age and older. This reflects the parenthood phase during prime age (25-54), the separation of adult children from the household, divorce, and the heightened possibility of eventually losing a life partner as the Boomers age out.
Hence, as an increasing share of the population shifts into older age groups, more and more households tend to be formed. Said differently, as a given household head ages, the size of the household in terms of people tends to become smaller. And remember, this generation is a much larger group than the one that preceded it, which means that they demand much more housing.
Existing Inventory. That leaves less existing inventory for the younger buyers, especially millennials as they reach an age where they can form a new household and buy a home. So despite notable increases in demand from the 35-44 cohort, almost all of the additional demand is explained by the aging population, with significant increases in households in the 65-74 and 75+ groups.
The youngest Boomers are 59 years old, and not yet retired, while the oldest are 77 years old. Along the way, the retirement age (65+) cohort grew from about 13% of the civilian population in 2010 to 16.5% in 2020, and it is expected to increase to 20.5% by the end of this decade. Trends for the 75+ group are even starker, with the share expected to expand from 6% in 2010 to 9.5% by the end of this decade, then well above 10% in the decades that follow.
Meanwhile, the housing shortage has remained a major headwind for homebuyers. Rising mortgage rates have stalled out the market’s inventory. Existing homeowners are reluctant to sell and risk giving up a lower rate they secured before the Federal Reserve’s aggressive interest rate hikes that have pushed mortgage rates to a two-decade high.
These pressures have had a negative effect on inventories; the share of homes listed for sale dropped 18% over the same period last year, marking the biggest fall since the start of 2022. The limited inventory also means buyers must compete for a limited pool of housing, pushing home prices higher.
The aging Boomers and their housing needs will be a factor in driving the housing market for years to come.
AVP Pulse Index. The last quarter shows more of the same, and the construction trends continue to be steady with the AVP Pulse Index maintaining a very tight range. While the Index is down 1.1% from the prior quarter, it is still up a robust 7.1% year-over-year. A big driver of the movement last quarter was the run-up in Industry Stock Prices, which have all seen a pullback this quarter amidst the expected profit-taking after posting 52 -week highs. However, they are all still up a whopping 41.2% as a group, but the pullback has acted as a downdraft on our formula for calculating the Index.
A positive impact on the Index came from new housing market activity; Case Shiller was up 0.9%, and housing starts are still up 3.9% despite 7% mortgage rates that are weighing heavily on homebuyer demand. But there are still some possible risks to the construction industry and its corresponding impact on construction aggregate demand. The current UAW strike is an unknown, and of course the concern that the Fed will over-tighten and stall the economy is still a possibility, but I am not betting on any of that happening.
To summarize the longer view, I’ll say again what I have said since the beginning of the interest rate hikes: no recession. I have not wavered from that view and barring a “Black Swan” event that no-one currently sees coming, the economy will continue to remain steadily apace. And I’ll repeat what I said last quarter, because nothing has changed our outlook: when interest rates stabilize and cuts start taking place, it will be because inflation is tamed. I still think that is possibly as early as sometime next year, but regardless of timing, get ready for another broad economic expansion that will be a boon to construction aggregates.
Pierre G. Villere serves as president and senior managing partner of Allen-Villere Partners, an investment banking firm with a national practice in the construction materials industry that specializes in mergers and acquisitions. He has a career spanning almost five decades, and volunteers his time to educate the industry as a regular columnist in publications and through presentations at numerous industry events. Contact Pierre via email at [email protected]. Follow him on Twitter @allenvillere.