How are changing prospects in US demographics impacting housing and wood product demand?

Housing has been in the US Federal Reserve’s cross-hairs as the central bank has been aggressive in fighting inflation. From a construction perspective, we are expecting a bumpier ride through 2023 and housing demand declines could become even more acute if high mortgage rates persist.

The challenges ahead for the housing market in the near term are well-known, namely higher borrowing costs and a softening macro economy. But the larger question looming is what the demographics tell us about what we can expect in the longer term. Once we have these higher rates behind us, can we expect demographics to still be a strong tailwind?

With the latest 15-year lumber and panel release, we have lowered our housing starts and household formations forecasts. In this article, we will examine the reasons behind the downward revisions to our demographic outlook.

Declining headship rates and missing young adult households

Using US Census Bureau formations, we estimated that household formations grew by over 3.0 million in 2020 and by about 1.0 million in 2021. The demographics have been supportive, but headship rates have been lower than historical averages. The headship rate – which is defined as the number of total households divided by the population – can be used to calculate a proxy for household size.

For decades, the US headship rates of young adults have been declining, suggesting the US housing market has been missing millions of new young adult households. Close to 46% of adults ages 25-34 were household heads between 1990 and 2000. For several years, the headship rate for this age group declined, hitting a bottom of 40.2% in 2017. The headship rate has improved since then but remains lower than historical averages (Figure 1).

If the headship rate had averaged closer to 46% since 2011, the market would have had 8 million-10 million more households in this age group. This does raise the question: Where did all of these potential renters/owners go?

More young adults are living at home

Headship rates are low because the share of young adults living at home has been quite high. That share climbed after the Great Recession and has remained stubbornly high. While this share leveled off in 2019, it rose to its highest level since at least 1983 in 2020 as the pandemic resulted in major job losses, particularly among the young and gig workers.

With the labor market as tight as it is currently and more young people venturing back into the shelter market, that share eased in 2021, although it has remained elevated. This level should improve again in 2022 but will remain high historically, partly due to affordability issues that are growing more acute.

This large share of young adults still living at home is an element in the pent-up demand story. There would likely be more demand in the housing market if affordability were not so constrained and rates were not so high. But this high share also potentially represents a demographic shift as well, and some of it is likely permanent.

Pew Research reports that the demographics that showed the greatest gains in population growth (Hispanic and Asian Americans) are more likely to share a home with relatives, suggesting that the number of young adults living at home will continue to be above historic averages.

Despite the lower headship rates and more young adults living at home, the sheer size of the Millennial generation has been historic (Figure 2). But given current demographic trends and adjustments to projections, this surge in the population is likely mostly behind us. While the country will still have a high number of adults reaching prime home-buying age through the next few years, the large population increases are now in the rear-view mirror. Between 2010 and 2021, over 6.0 million Americans entered their prime home-buying years, but this age group will not continue to grow at such a fast clip.

2017 US Census figures were outdated

We based previous long-term formation projections on the last US Census data, but the Census has not updated its projections since 2017. Declining birth rates, slower immigration and the impacts of Covid-19 suggest that those Census figures are now outdated and too optimistic.

Why were the US Census figures too optimistic?

1. Fertility rates. Fertility rates fell after the Great Recession and never recovered as the Census expected; in fact, rates have been declining relentlessly, exacerbated by the pandemic. In 2020, the rate hit its lowest level since the government began tracking the data in the 1930s. Fertility rates are now well below the “replacement level” of 2.1 births per woman that would be required for the US population not to shrink without immigration.
2. Mortality rate. Prior to the pandemic, life expectancy had essentially flatlined. Covid-19 resulted in higher deaths overall and worsening societal ills such as deaths from opioid overdoses also affected the mortality rate. All of this has meant a smaller “natural increase” in the population (births minus deaths) than what the bureau projected. While the 2017 Census official estimate for the US population in 2021 was about 335 million, the actual figure came in at just under 332 million.
3. Net migration. Net migration in particular has been a weak spot for the Census forecast, and actual immigration levels have come in well below the bureau’s 2017 projections. According to those estimates, the baseline foreign-born population for 2020 was forecast at 46.7 million, while the low immigration scenario was 44.8 million. The foreign-born population for 2020 came in a 44.1 million, even below the bureau’s more pessimistic 2017 scenario. While immigration rebounded in 2021, at 45.3 million, the foreign-born population was still below the Census projections of 47.4 million by about 2.0 million people.

Without updated Census numbers, Fastmarkets pivoted to another reputable data source for our latest long-term lumber outlook. The Congressional Budget Office (CBO) released its estimates by age class in July 2022, reflecting the demographic challenges of the last few years. The CBO projections are lower than what the Census predicted in 2017 (Figure 3).

At the end of our forecast interval in 2037, the current CBO projections call for the total population to be at 354.6 million, compared with the last Census figure of 368.4 million – almost 14 million fewer people. From 2023 to 2037, the US population is expected to grow by about 0.4% per year, compared with the Census estimate of 0.6% per year.

The housing market is still under-supplied despite slower population growth

While this demographic change is a negative, the market has not been building enough homes in the last decade to meet the household growth the US has been experiencing. In particular, there have not been enough starter homes and that has been worsening the affordability crisis of the last few years. But how under-built is the current shelter market?

Assuming a target vacancy rate of about 12% (a more normal level of housing inventory) and a total headship rate of about 51%, Fastmarkets estimates that the market is currently under-built by about 2.0 million units. So while we are expecting slower population growth, there is still an under-supplied element to the forecast that will be supportive of construction running above household formation trends in the medium term.

Nonetheless, with this forecast, we have lowered our housing outlook out to 2037 to account for what is shaping up to be a weaker period for demographics compared with the previous decade.

While housing construction in the medium term will likely outpace household formations somewhat given under-building, over the longer term construction should cycle back to underlying demographic trends. As with last year, we do assume that headship rates will continue to improve, though for the age classes under 65 the rates will stay below pre-Great Recession peaks.

In last year’s long-term outlook (2026-36), the forecast called for household formations to average about 1.20 million units per year. But with this year’s release, formations in 2027-37 will average a lower 1.01 million units per year. Assuming net removals of about 250,000-300,000 units per year and seasonal home demand of 60,000 units, underlying demand for shelter should average about 1.37 million-1.45 million units per year in the last decade of the forecast, compared with last year’s estimate of 1.55 million.

For more information on how the demographic updates affects our housing and wood products demand outlooks, check out our latest 15-year forecasts on the customer portal, or speak to our team about accessing our news, analysis, forecasts and more.