Younger Demographics Will Continue Fuel the Demand for Housing

September 23, 2022

The demand for housing spans across multiple generations. Residential real estate will continue to be a hot topic and a coveted asset for many years to come.

Each generation has had to overcome hurdles on the way to homeownership. Despite each generation’s obstacles, things seem to work their way out for the better. Time and time again, homeownership has proven to be a great wealth building tool.

Baby Boomers got stuck with sky high interest rates, but were able to refinance and build their wealth through equity appreciation. Gen Xers were lucky enough to enter their prime home-buying age in the years leading up to the Great Recession and had to shoulder the boom and bust. Millennials were late to the home buying party and paid the highest housing prices in history, but with lowest monthly payments because of lowest mortgage rates. What the future holds for Gen Z is a function of many factors, but one thing is clear, they’re ready to start buying houses.

Collectively, there are many reasons to be optimistic about the future of real estate. With demand stemming from multiple generations, the housing market will continue to strengthen.

1. Millennial buyers are making up for lost time

Home Ownership by age 30

For a while, Millennials’ rite of passage looked different than that of other generations. With a lot of them graduating high school and college amid the Great Recession, finding a job was hard. As a result, they either went back to school or otherwise postponed adulthood. Some got stuck with larger loan debt, which hindered marriage and homeownership.

For the longest time, statistics wrongly pointed to Millennials being a generation of renters. Last year proved that they may be no different than those that preceded them. Once they were ready to start a family, the desire to buy a house followed. Now they need to catch up. At the age of 30, only 42 percent of Millennials own homes, compared with 48 percent of Gen Xers, and 51 percent of Baby Boomers at the same age.

Millennials still need to catch up to their predecessors. Look for the Millennial homeownership trend to continue in 2022 and beyond.

2. Millennials continue to fuel the demand for housing

Millennials Poised to Enter the Housing Market

Millennials are the largest generation on record. Their thirst for housing became readily apparent over the last few years as they accounted for 37 percent of all buyers in 2021 according to the National Association of Realtors. This emergence came alongside the largest cohort of Millennials turning 30 in 2020, meaning that almost 15 million will enter their prime home buying age (32) in 2022.

At present, there aren’t enough houses to satisfy this demand. FreddieMac estimates the housing shortage had increased to 3.8 million units at the end of 2020, a 52 percent increase compared to 2018. Millennials are the most educated generation to date with higher paying jobs than older generations in many instances. As such, they can afford to pay and compete for properties as they become available. This means that Millennials are going to remain a strong force in the housing market for the next 3 to 4 years.

3. Gen Zers will begin to buy houses next year

Gen Zers will begin to buy houses next year

By 2025, Gen Z will make up one third of the workforce. At the same time, the oldest members of this generation will start turning 30.

It’s clear from survey data that they view homeownership differently than Millennials. The COVID-19 pandemic put the importance of having space in a different perspective for those in Gen Z. Many graduated from college and needed to move in with family to ride out the pandemic. In some ways, this has accelerated their plans to enter homeownership .

According to Realtor.com, 26 percent of surveyed Millennials changed their interest in buying a house post-pandemic, 45 percent are already saving to buy their first house, and 72 percent of Gen Z plans to own. In fact, nearly half of them plan to buy their first home by the time they are between 26 and 30 years old. As such, the demand for housing will continue in the future as Millennials and Gen Zers compete for properties.

4. Anticipated interest rate increases won’t impact demand

Home Prices and Mortgage Rates

In February 2022, interest rates surged above 4 percent for the first time since 2019. Though rate hikes have been mentioned as a cause for concern in the housing market, a 100 Basis Point increase in rates won’t impact demand.

A common misconception is that as interest rates increase, the price for housing falls because there is less demand. However, buying a house is less about property value and more about what people can afford as a monthly payment. Monthly payments won’t be drastically different as the result of a 100 Basis Point increase. Plus, compared to other periods in time, interest rates are relatively low. Assuming interest rates don’t skyrocket, demand for housing should persist.

5.Baby Boomer’s living situations are changing

Baby Boomer’s living situations are changing

A record number of Americans will turn 65 this year and the first cohort of Baby Boomers will turn 80 in the next three years. Traditionally, retirees sold their homes and downsized or moved into retirement communities. In contrast, Boomers born between 1946 and 1964 chose to age in place.

Baby Boomers own a substantial portion of real estate across the country. In 2020, 11.3 million homeowners were 75 or older, which made up 13.5 percent of all homeowners. AARP finds that 77 percent of adults over the age of 50 want to stay in their homes as long as possible. The pandemic might have exacerbated this, especially for younger boomers, who witnessed the tragedy of their own parents passing away in long-term care and retirement facilities. They also might have witnessed their parents living in isolation during lockdowns and strict policies.

While we won’t know how this is going to impact their attitude toward long-term care facilities for a few years, one thing is certain: aging in place has an expiration date. At some point, it’s no longer safe. It’s a matter of when, not if this will happen. When this transition occurs, Millennials and Gen Zers will be ready.

Real estate: When Lifestyle Choice Meets Wealth Building Mechanism

Generational transitions will play a huge role in the demand for housing for years to come. With two emerging generations ready to buy houses, there’s reason to believe that the real estate market will remain strong. Gen Zers and younger Millennials want homes. They are more efficient at using technology, making them savvier at both investing and saving. These have enabled them to afford the costs of homeownership and identify best times to get into the market.

Meanwhile, Baby Boomers are living longer and they want to age in their homes. Many purchased homes when interest rates were at 16 percent and refinanced over time to build enormous equity. Even Gen Xers impacted by the Great Recession were able to get back into the market, build equity, and just refinanced.

Real estate is the best instrument to build wealth over time, regardless of generation.

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Polina Ryshakov

Polina is Sundae's Sr. Director of Research and Lead Economist. She has more than 15 years of valuation experience across commercial and residential real estate. Her background includes stints with Cushman & Wakefield, Hanley Wood, and Standard & Poor’s. Polina graduated with a double major in Economics and International Relations from the University of California at Davis and has been a CAIA Charter Holder since 2010.