Strong demographics have driven US demand for housing over the past several years. As millennials, now the largest generation alive in the country, have reached a peak home buying age, there has been an increase in demand for home purchases and rental units. This demographic strength has been one of many variables that have pushed home prices higher than before the pre-pandemic period.
But when it comes to demand, demographics aren’t everything—economics matter, too. And persistently high inflation, and a great deal of economic uncertainty, risk that housing demand could slow in the coming years. What happens to demand in the coming years will have major implications for real estate investors.
Thus, in this article, I’m going to break down recent demand trends, provide forecasts for national demand over the coming years, and list the top and bottom 10 markets for housing demand growth.
demand measurement
There are many ways to measure housing demand. We typically look at certain group metrics such as total sales volume, mortgage purchase applications, and months of inventory and supply to measure the balance between supply and demand. In the rental market, we commonly use a metric called “absorption,” which measures the total number of rental units occupied in a given market. To combine these different markets into one useful metric, I like to track the total number of households and the growth rate of that number.
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If you’re unfamiliar with the formal definition of “household,” the Census website explains, “A household (or “ordinary household”) in the sense of the Census Survey describes all persons sharing the same principal residence without these Essentially related by blood.
In other words, a house is any dwelling unit occupied as a primary residence. If you live with your parents, that is a house. Live with a partner and your kids? That is a house. If you live with one or more roommates, even if you’re not blood related – it’s still a house.
This definition makes sense because it helps us measure the total demand for primary residence housing units. In theory, this should equal the total demand for primary housing in the country if you add up all the homes in the US (this analysis does not include demand for second homes or short-term rentals).
Over time, the total number of households tends to increase as the population continues to grow. The birth rate in the US has slowed significantly, but it will take decades for this to be reflected in household formation numbers. In fact, we are at a high point of domestic development right now.
According to the 2020 US Census, the largest age group in the US are 25-29 year olds, followed by 30-34 year olds. This population distribution aligns closely with the age at which most people start their household, which is usually when a person reaches their late 20s or early 30s. This demographic reality has driven a strong demand for rental units and housing for many years.
But as I said at the beginning of the article, population is not the only factor that affects home construction. Household formation can be slow even with a strong demographic. And the opposite is also true – a boom in home construction can occur even when population trends are not particularly strong. Economics plays a big factor in home construction. People will not take the financial leap to build a house unless their financial condition supports it. And right now, as we all know, the economic picture is grim at best.
Over the past several years, rising rents and rising home prices have made housing generally unaffordable in what is now the U.S. “rent burden” for the first time, and housing affordability has reached its lowest level in decades. All of this is happening at a time when inflation is eating into the spending power of all Americans, and there are fears of further economic pain in the future. Basically, this is not a good time to start a home if you don’t have to, and the data supports it.
As shown by this data from Costar, home construction has been on a wild ride over the past few years (as has basically all housing market data). After a brief period of negative growth during the start of the pandemic, housing construction recovered rapidly – leading to strong demand for homes and rental units. But the frenzy peaked in the third quarter of 2022 and has come down sharply. CoStar provides a forecast (shown in orange) of where they expect home construction to be in the coming years, and it is clearly lower than pre-pandemic. Personally, I think there is somewhat more downside risk in the short term than I see in this forecast, but I think the 5-year average is probably about right, given demographic trends.
This slowdown in demand will definitely affect real estate investors, as it will likely lead to slower growth and higher rents in the years to come. But, it is important to recognize that demand is still rising, and most experts believe that we are still short supply for housing in the US, meaning that demand may be slowing, but supply is short. Because of this, the market may not reach equilibrium soon.
The data shown above is at the national level, and as we all know, real estate is local. Using historical data and 5-year forecasts from CoStar, I found 10 markets with the strongest forecasted demand and 10 markets with the weakest forecasted demand in the coming years. I filtered only for markets with more than 100,000 homes because many of the smaller markets are less recognizable (and probably all of you reading this).
Top 10 Markets for Forecasted Demand
| City | CAGR of last 5 years | 5 Year Forecast CAGR |
|---|---|---|
| Provo, Utah | 4.3% | 2.1% |
| Austin, Texas | 4.8% | 2% |
| Lakeland, Florida | 2.1% | 1.8% |
| Boise, Idaho | 3.8% | 1.8% |
| Ogden, Utah | 2.6% | 1.7% |
| Myrtle Beach, South Carolina | 2.6% | 1.6% |
| Houston, Texas | 2.5% | 1.6% |
| Orlando Florida | 1.6% | 1.5% |
| Charlotte, North Carolina | 2.5% | 1.5% |
| Dallas-Fort Worth, Texas | 2.3% | 1.5% |
Bottom 10 Markets for Forecasted Demand
| City | CAGR of last 5 years | 5 Year Forecast CAGR |
|---|---|---|
| Charleston, West Virginia | -1.5% | -1.2% |
| Flint, Michigan | 0.2% | -0.5% |
| Youngstown, Ohio | -0.1% | -0.4% |
| Erie, Pennsylvania | 0.1% | -0.4% |
| Binghamton, New York | 0.6% | -0.3% |
| Rockford, Illinois | -0.2% | -0.3% |
| Peoria, Illinois | -0.3% | -0.3% |
| Huntington, West Virginia | -0.8% | -0.3% |
| Canton, Ohio | 0.3% | -0.2% |
| Utica, New York | -0.1% | -0.2% |
These lists are not comprehensive, but should give you a sense of the range of expected outcomes in the coming years. For top markets such as Provo, Utah, and Austin, Texas, the total number of households is expected to grow at a rate of 2% each year over the next five years. On its side of the equation, we have Charleston, West Virginia, which is projected to decline by 1.2% each year over the next five years.
conclusion
For investors who are considering which market to invest in, I highly recommend that you study the home construction patterns in your city. Population growth is a good start, but if you really want to understand what’s happening with housing demand, look at household formation. The Census Bureau has free data that you can analyze to see historical performance, and you can Google estimates for your city to give you an idea of what might happen in your area.
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Note by BiggerPockets: These are the views expressed by the author and do not necessarily represent the views of BigPockets.
