Demographics ultimately drive housing demand. Sure, higher interest rates and economic recessions can dampen demand in the short term, but in the long run demand sets the bar for housing supply.
The huge millennial generation is set to drive demand for the next decade at least. Yes, problems with student debt, a so-so job market for recent graduates, relatively low household formation rates, and delays in getting married and having kids have so far been flood gates to this generation’s demand to own a home. So much so that only one-third of those under 35 years old now own a home.
As a result, most builders have been reluctant to make a big bet on affordable, starter housing. However, with the U.S. Census Bureau and First American title insurance company forecasting that millennials will buy at least 10 million houses in the next 10 years, maybe builders need to double down on this influential demographic group. As it is, in 2018, 50% of purchased mortgages guaranteed by Fannie Mae and Freddie Mac went to millennial first-time buyers.
So millennials already are driving significant demand, and that demand is almost guaranteed to increase. And, yes, builders will control supply. But this isn’t simply a numbers game. Don’t build what millennials want, and they’ll instead buy existing homes.
Figuring out what they want can be confusing. For example, the most popular clothing retailer for millennial women is Forever 21, a national chain that offers the latest fashions at low prices. So price matters. On the other hand, millennials love craft beers. They’re 50% more likely to drink it than boomers, even though it’s relatively expensive. Asked why they’ll pay a premium, about half said “it tastes better than Bud.” So price isn’t the only thing that matters.
Maybe you can’t easily equate blouses and beer to housing supply and demand. So let’s look at the new-car market instead. Of the 10 most popular cars with millennials, six are Japanese, four are American. The six Japanese cars have a 20% share of market, the four American cars an 8% share. I asked a friend who spent 20 years as an automotive designer and engineer to tell me why he thinks the Japanese cars outsell American models. His answer: the Japanese models are perceived to have better technology and be more reliable, sexier, and more fuel efficient. Not to mention they’re smaller and less expensive.
Interestingly, General Motors decided to stop producing the Chevrolet Impala, which made that best-seller list. Why? Sedans are not as popular and profitable as the big SUVs, trucks, and crossovers that GM sells. A few months ago, Ford announced it would stop building sedans to focus on trucks, SUVs, and crossovers. Millennials be damned.
Problem is, by historical standards, neither Ford nor GM really sell that many SUVs, crossovers, and trucks. Over the past 60 years, GM’s share of the total market has declined by two-thirds, or 67%. Nonetheless, GM can’t seem to forget its glory days in the 1950s, when the Cadillac Eldorado and other models ruled the road.
Maybe back then bigger really was better for GM. But most auto analysts point to GM’s long-term inability to build small, fuel-efficient cars (that buyers bought) to explain its tailspin. And maybe bigger really was better for the housing industry 10 years ago. But there’s now a new breed of buyer dictating demand. And there’s this: new housing’s share of total houses sold has declined by about one-third in the past decade. That’s a free fall to rival GM’s. Maybe it’s time to forget the glory days of 2000 to 2007 when bigger was better. If you want to capture today’s market dictated by millennial buyers, forget the chrome and tail fins and assume building smaller, streamlined housing really is the smarter strategy.
