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Major Changes in Housing Demand Are Only Two Years Away

Strategic Building Market Intelligence™

John Burns
May 1, 2002
HousingZone



	John Burns' Editorial Archives

While it is difficult to predict fluctuations in the economy, I can tell you with absolute certainty how old I will be on my next birthday. I also can tell you how old almost everyone in your local area will be next year. In fact, my company's analysis of recently released census data can help you determine what types of new homes will be in greatest demand in your market during the next few years. The answers might surprise you.

By compiling and analyzing statistics on all 330 metropolitan markets (and 19 consolidated metropolitan markets), we uncovered enlightening facts, including:

The explosion in move-up housing demand will end in 2004.
After nine years of declining demand, demand for traditional entry-level housing will increase in 2003 and 2004, only to decline steadily thereafter.
The greatest traditional home building opportunities will exist in the luxury and second-home markets.

For this report, we focus on the 58 major metropolitan markets with populations of more than 1 million. Data on these 58 markets, as well as the remaining 291 metropolitan areas, are available here.

There are plenty of nontraditional opportunities as well, including housing for a growing population of older, first-time buyers (many are single women), as well as Hispanic buyers (a group whose homeownership rate is rising steadily). These topics will be covered in future Strategic Building Market Intelligence reports.

Homeownership patterns are fairly predictable. Most people buy their first home in their early 30s. Many buy the largest, most expensive home they'll ever buy in their early 40s. Those who can afford second homes or luxury homes buy them in their early 50s, and retirees usually buy after age 65 if they are going to buy at all.

Why will housing demand change dramatically during the next few years? Examine the following chart. Approximately 3.8 million U.S. residents were born in 1950. Compare that with 1960, the birth year of more than 4.7 million U.S. residents. More people, including recent immigrants, were born in 1960 than in any other year. After 1960, the number of U.S. residents born each year declines almost every year, reaching a low of 3.6 million people born in 1974. Clearly, the surge in older buyers and the decline in younger buyers will have tremendous impacts on the housing market. For a chart of your market, click here.

Entry-level buyers
There are already enough homes in the country to satisfy the demand for traditional entry-level buyers. Because 5 million fewer U.S. residents were born in the 1970s than in the 1960s, the number of traditional, entry-level buyers (33-year-olds) has been declining since 1993 (see the chart below) and is expected to decline through 2008, except for increases in 2003 and 2004. Only five of the 58 largest metro areas are expected to experience increases in 33-year-olds during the next eight years. While strong immigration might create limited growth in a few more metropolitan areas, the long-term trend is not good for home builders and manufacturers that focus on traditional entry-level buyers.

Of course, there are still plenty of affordable housing opportunities for entrepreneurial builders. These include:

Older Buyers - The rise in homeownership is partially driven by older buyers buying their first home (the homeownership rate increases from 65% of 39-year-olds to 81% of 59-year-olds).
Condominiums - Condominiums are also popular because many buyers are deferring marriage and children or are not having children at all.
Internet Access - Communities with high-speed Internet access are popular among all ages.
Better Amenities - Many young buyers today prefer amenities that are rare in the existing home market, such as larger kitchens and entertainment rooms.

The best and worst markets for traditional entry-level buyer growth are:

Best Markets	ááá	Worst Markets
1. Salt Lake	ááá	1. Ft. Lauderdale, Fla.
2. Oklahoma City	ááá	2. Middlesex, N.J.
3. Austin	ááá	3. West Palm Beach, Fla.
4. Norfolk, Va.	ááá	4. Bergen-Passaic, N.J.
5. San Diego	ááá	5. Newark, N.J.

Click here for a complete metropolitan area ranking of entry-level buyers.

Move-up Buyers
While move-up buyers have driven the housing market for the past 20-plus years, the growth in move-up buyers (traditionally 43 years old) likely will taper to virtually zero in 2004 (see chart below). The number of move-up buyers is already declining in Pittsburgh, Cleveland, New Orleans, Detroit and Buffalo, N.Y. The strongest move-up markets are Los Angeles, New York, the San Francisco Bay area, Dallas-Fort Worth and Chicago. In some markets, such as Las Vegas, the move-up boom will continue until 2008. Click here for a complete metropolitan area ranking of move-up buyers.

Executive Home Buyers
Older buyers will dominate the new home market for years to come. During the next eight years, the number of 53-year-olds will increase by 22%, or 791,000 people, excluding immigration and mortality. Home builders who build either lower-maintenance or luxury homes that are suited for adult living will achieve the greatest success. Keep in mind that the resale market has insufficient supply to meet the demand of these discretionary buyers.

Second-Home Buyers
The second-home market also will boom, which is excellent news for Florida, Arizona and exurban locations such as southern Utah and central Arkansas. While all 58 major metropolitan markets will experience growth in second-home buyers during the next decade, the strongest growth will be in Tampa, Fla., Seattle, Denver, Portland, Ore., and Philadelphia. This does not mean the builders in these areas will be successful. These areas are the target markets for marketing to second-home buyers, many of whom (especially in Seattle, Portland and Philadelphia) will opt for sunnier climates or rural areas such as western Idaho. If you build second homes, your marketing dollars will be spent most wisely in those markets. Click here for a complete metropolitan area ranking of second-home buyers.

Retirement Buyers
Del Webb, US Home (now owned by Lennar) and others have learned that the toughest home to sell is a retirement home. Retirees are veteran home buyers who are skeptical about promises to deliver future amenities or high-quality homes at a low price. Many retirement buyers visit more than 10 times before purchasing, and are frequently swayed by friends who have already bought a home from the builder and can therefore testify to the quality of the homes and the community.

While the U.S. retirement population will grow steadily during the next few years, the real opportunity will begin in 2012, when the first baby boomers turn 65. Experienced retirement builders, however, know that the retirement housing business is much different from the home building business. Retirement housing requires significant infrastructure investment and higher marketing and operational expenses. The business model is much different from the model for traditional home builders. This is why so many retirement communities are developed by companies that specialize in retirement housing. Note that the retirement communities of large builders are developed by a national group that specializes in retirement housing rather than the local home building division. It takes years to build a successful retirement housing operation and brand name, so now is the time to start.

A Word on Job Growth and Mortgage Rates
Demographics are not the only key factor in housing demand. Other key factors include:

Job growth, which determines how many people are entering or leaving the area in search of employment.
Mortgage rates, which determine how much people can afford to pay for a home.
Recent home price appreciation, which provides the down payment for most move-up home buyers.

However, your current population base provides the basis for most of the new home demand during the next few years. If you can build homes to meet the demand of people currently residing in your market, you will weather the storm of economic cycles much better than your competitors.

Conclusions
It might be time to change your focus. Examine the age of your local population to determine where the greatest opportunities lie. What are the growing age groups, and what do they want that is missing in the resale market? Should you consider expanding into a market where the growth prospects are better? Is now a good time to sell your company or to buy your way into a new market? Gather the information necessary to answer these questions.

If you are a building products manufacturer, plan on expanding your capacity to deliver products demanded by high-end buyers, but monitor your competitors carefully. If the competition also plans to expand on its high-end products, you might be able to increase your market share at lower price points at the competition's expense. Successful manufacturers have the processes in place to monitor and react to changing market conditions.

The age of your local population is the most predictable component of housing demand. Knowledge of the growing age groups in your market will help you build homes that appeal to many buyers, regardless of job growth or mortgage rates. Click here to view the demographic outlook for your market or send me an e-mail to get the actual statistics.

About the Author John Burns publishes three free Building Market Intelligence e-mails each month: U.S., Local and Strategic. He helps real estate executives develop and execute strategic plans, conduct market research and maximize profitability. More information on his company is available at www.realestateconsulting.com.
© 2009, Reed Business Information, a division of Reed Elsevier Inc. All Rights Reserved.

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