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Baby boomers may be to blame for today's housing imbalance, Barclays says

Millennials may have another beef with boomers: the shortage in housing.

In a note from Barclays' housing research team, economists point the finger at the aging Americans fueling the demand for homes as the market remains surprisingly resilient.

"The US housing sector is on the upswing again, even with mortgage rates at multi-decade highs. Although much has been attributed to shortages of existing properties and mortgage lock-in effects, we think strong demand is a symptom of the aging population," Jonathan Millar, director and senior US economist at Barclays Investment Bank, wrote in a note to clients.

"The theory that the aging population would require fewer homes isn’t quite accurate. It turns out older consumers tend to prefer smaller dwellings but not fewer homes. The Barclays housing team makes the argument that currently more boomers are partly responsible for creating more households, putting pressure on housing demand.

"This is because the composition of the population has important effects on demand: a given person is generally more likely to become the head of a household as he or she ages, with the highest likelihood occurring beyond retirement age," Millar wrote.

"Hence, as an increasing share of the population shifts into older age groups, more and more households tend to be formed. That is, as a given household head ages, the size of the household (in terms of people) tends to become smaller and smaller, with children moving out and couples separating because of divorce or death," the economist added.

However, there’s a difference now from the previous aging generation. The boomer generation is a much larger one, so they are using up more houses than prior generations as they age.

"Retired people always are much more likely to be the head of a household than those in pre-retirement age. This is because a given person in this age group is much more likely to be a single head of a household, especially as they, inevitably, lose a life partner," Millar told Yahoo Finance in an email. "The difference now is that this generation is a much larger group than the one that preceded it, which means that they demand much more housing."

That leaves less existing inventory for the younger ones, especially millennials as they reach an age where they would form a new household and buy a house.

"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," Millar wrote.

The youngest boomers are 59 years old, and not yet retired, while the oldest are 77 years old. Boomers will eventually require "less housing" as this group ages, but it will take time for that to happen.

US resident population. Census Bureau estimates through June 2022 are extrapolated using UN projections.
US resident population. Census Bureau estimates through June 2022 are extrapolated using UN projections.

"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," Millar wrote.

"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," he added.

But there’s still an upside for the younger generation.

"Unlike the boomer generation, the population in these younger age groups is not especially large in comparison to what it has been over the past few decades," Millar told Yahoo Finance, signaling the current demand dynamics for housing may not persist in the future.

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.

The share of homes listed for sale dropped 18% over the same period last year, marking the biggest fall since the start of 2022, according to Redfin’s August market update.

The limited inventory also means buyers must compete for a limited pool of housing, pushing home prices higher.

What drives household formation?

...pushing people into age groups where they are more likely to head a household
...pushing people into age groups where they are more likely to head a household

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.

The move happens as younger adults venture away from college and their parents. Per Barclays, the available data through 2022 shows that there’s a rise in household formation at the age of 25, which increases steadily and peaks around retirement age and older.

"Among other things, 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 to death," Millar noted.

Dani Romero is a reporter for Yahoo Finance. Follow her on Twitter @daniromerotv.

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