
Those in the real estate industry are familiar with the “lock-in effect” that is currently limiting housing mobility. The lock-in effect captures the reluctance of millions of Americans to sell their homes as 90% of homeowners with a mortgage have a mortgage rate under 5%, while market interest rates are in the high 6% to low 7% range. This would seem to imply that total home sales should be down significantly in 2023, and the latest data captures that this is true.
However, so far in 2023, there still have been roughly 5 million total home sales on an annualized basis. We wanted to investigate what may be the driving force behind this surprisingly high sales volume.
To get at the answer, we identified categories that collectively we are calling structural demand or “life happens” demand. These categories include births, deaths, migration, marriage, divorce, and retirements.
While the factors listed have been and will continue to be drivers of housing demand, other factors such as investors, flippers, second-home purchasers, shoppers on the margin, and fear of missing out buyers can ebb and flow based on market conditions.
- Births. Births influence demand as growing families tend to need more space, which often leads to household formations, relocations, or new purchases. In fact, the birth of a child can often be enough of a driver to an existing homeowner to reset their interest rate if their current home doesn’t suit the growing family’s needs.
- Deaths. The U.S. had an estimated 3.3 million deaths in 2022. This unfortunate inevitability can have an impact on housing demand. Those living alone at the time of death or with a partner that now wants to vacate the property could result in an uptick in supply (depending on what the remaining family wants to do with the home). Increased supply is extremely important to help support sales in today’s market so death can be a driver of increased housing activity.
- Migration. Migration has increased since the start of the pandemic and has impacted overall housing activity. Those selling and moving into another property will impact both the supply and demand pools, while a mover converting from renting to owning will pull from the supply pool without adding to it. Migration in the U.S. has favored the South and West regions as people move for affordability, lifestyle, or tax reasons.
- Marriage. Research shows that married individuals are more likely to be homeowners than those who are not married. Of first-time buyers, estimates show that 50% are married couples compared with 19% single women, 18% unmarried couples, and 10% single men. The impact of marriage on for-sale housing demand will depend on where and how the partners lived before the nuptials.
- Divorce. Divorce can also drive demand for housing as couples that split typically need two separate living spaces and form a new household.
- Retirements. Retirements have a mixed impact on housing demand given the propensity to own a home goes up with age. This means a move related to retirement may not lead to any additional net housing demand, but the sale of an existing property and the purchase of a new one can still contribute to total housing volume.
When we adjust each of these factors for the negative, neutral, and positive changes to demand, we calculate a rough estimate of demand for 4 million structural demand sales this year. This doesn’t include those generically converting from renting to owning or moving out after living with parents or family (household formations), investors, second-home buyers, or international demand.
Based on our analysis, the top five states for life happens housing demand as a share of total population are Florida, South Carolina, Montana, Idaho, and Tennessee. Many of these states share some commonalities including lower taxes, desirable climates, growing employment opportunities, and outdoor activities.
- Florida. Florida is a well-known migration destination for a variety of reasons. Warm weather, sunshine, and a relatively low tax burden are attractive to relocators, including a large retiree population. Florida’s strong and growing job market also makes it desirable to younger, working-age families.
- South Carolina. South Carolina’s desirability is similar to Florida as the state is also riding the wave of relocation to Southern states driven by shifting employment patterns, warm weather, and beach communities. South Carolina has one of the lowest per capita tax burdens, which is a draw to relocators of all ages.
- Montana. Recent data from the Census Bureau shows Montana was a top migration destination given the state’s natural beauty, outdoor lifestyle, and relative bang for buck with housing. Montana had been on many people's radars, but a permanent move felt nearly impossible for many before the work-from-home changes brought on by the pandemic.
- Idaho. Idaho is like Montana in terms of amenities, with somewhat more affordable housing as well as outdoor recreation. The pandemic and remote work supercharged Idaho, particularly the Boise market. People from higher cost of living states (other Western states such as California, Washington, and Colorado) have sought out Boise as a cheaper place to live with a high quality of life. Boise is going through a market correction following the rapid run-up in prices over the past few years, but it retains its fundamental drivers of lower cost-of-living than coastal cities, remote work relocators, and outdoor lifestyle amenities.
- Tennessee. Tennessee has also benefited from the shift of investment and jobs to the Southeast, with Nashville being a particularly hot market. As with the other states, Tennessee has relatively low taxes that appeal to many households of all ages. Tennessee has also been recognized as a top state to retire in, and many parts of the state (most notably Great Smoky Mountains) also have scenery and outdoor activities.
The aforementioned states have the highest volume of life happens housing demand as a share of total population. If we look at the most growth in these categories relative to 10 years ago, the top states are Idaho, New Hampshire, Montana, Utah, and Delaware.
The importance of structural demand is to show that, even in slower housing markets, the underlying life happens events are still pushing the housing market forward. Understanding how this influences demand and buying behavior can help builders and investors target new markets and plan future developments.