Navigating the Shifts in the US Senior Housing Market: Trends and Opportunities
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The US senior housing market is experiencing a significant transformation, largely driven by the aging baby boomer generation. This demographic shift has profound implications for the housing market, influencing supply and demand dynamics, home prices, and the broader economy. As baby boomers age, their housing preferences and financial decisions are reshaping the landscape, creating both challenges and opportunities for various stakeholders.
The Baby Boomer Effect
Baby boomers, born between 1946 and 1964, are a significant force in the housing market. As of 2022, they comprised 21% of the US population and 38% of homeowner households. This generation's housing decisions are crucial in shaping the market's future. Baby boomers own 28% of the nation's large homes (three bedrooms or more), which is twice the share owned by millennials with children (14%). This trend is partly due to the financial advantages boomers had when purchasing homes, such as lower home prices and mortgage rates. A significant majority of baby boomers (78%) plan to age in place, meaning they intend to stay in their current homes as they grow older. This decision is driven by financial incentives, emotional attachment to their homes, and the lack of suitable downsizing options.
Homeownership Rate by Age
The homeownership rate varies significantly by age group. As of 2022, baby boomers have the highest homeownership rates, reflecting their financial stability and long-term investments in real estate. Millennials and Gen Z, on the other hand, face more challenges in entering the housing market due to high prices and limited inventory.
Housing Market Conditions
The current housing market is characterized by high demand and limited supply, leading to elevated home prices and affordability challenges, especially for younger generations. The typical homeowner now spends 11.5 years in their home, up from 6.5 years two decades ago. This increase is largely driven by older homeowners who are not financially incentivized to move. Many baby boomers who have mortgages benefit from historically low rates, making it financially unappealing to sell and buy a new home at today's higher rates (around 7%).
Retention Rates
Retention rates indicate the percentage of homeowners who remain in their homes over a given period. Baby boomers have high retention rates, partly due to their preference for aging in place and the financial benefits of staying in their current homes. This trend contributes to the limited supply of homes available for younger buyers.
According to Modernize Home Services, 75% of homeowners have considered aging-in-place renovations, such as walk-in tubs and non-slip flooring, for themselves or loved ones this year. The rise of e-retailers and online grocers has also eased senior independent living. Consequently, the percentage of seniors reporting difficulty in self-care has decreased from 13.6% in 2007 to 8.3% in 2021, a relative decline of nearly 39%.
Seniors have become a significant source of housing demand, leading to major market changes. Aging in place and the rise in senior households have increased overall housing demand. In 11 of the last 13 years, household growth has outpaced housing unit growth, with home prices up 120% since the 2008 financial crisis.
Seniors staying in their homes longer has made it harder for younger generations to buy homes, resulting in fewer homes returning to the market and crowding out first-time buyers. Currently, only 1-in-20 single-family homeowners are under 30 years old.
This trend has led to the popularity of single-family rentals (SFR) and garden-style multifamily properties, which offer suburban living and quality schools to families unable to afford homeownership.
Looking ahead, senior housing demand is expected to grow. An AARP study found that 86% of people over 65 want to stay in their current homes. Additionally, there are 10.1% more Americans aged 45-64 than 15 years ago, indicating continued high demand from retirees.
Supply and Demand Dynamics
The supply of large homes is constrained by the reluctance of baby boomers to downsize, while demand remains robust, particularly among younger families seeking more space. The lack of homes for sale is exacerbated by baby boomers holding onto their properties. This trend contributes to the housing affordability crisis, as limited supply pushes prices higher.
Supply Constraints
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Demand Pressures
New Construction
Builders are attempting to address the supply shortage by increasing the construction of new homes. However, the pace of new home construction has not kept up with demand, partly due to labor shortages and rising construction costs. In 2023, housing starts were down 9% from the previous year, with a significant decline in apartment construction (down 14%) and a smaller decline in single-family home starts (down 6%).
Cumulative Change in Boomer Homeowner Households
The cumulative change in boomer homeowner households over time shows a gradual decline as older boomers transition out of homeownership due to age-related factors. However, this decline is offset by the continued high retention rates among younger boomers, resulting in a steady overall presence in the housing market.
The Role of Younger Generations
Millennials and Gen Z are facing significant challenges in entering the housing market, influenced by high home prices and limited inventory. Millennials make up 28% of the adult population but own only 14% of large homes. Many young families are renting instead, with millennials with children occupying 24.8% of three-bedroom-plus rentals. The least affordable homebuying year on record was 2023, making it particularly difficult for younger Americans without home equity to purchase homes.
Economic Context
The broader economic environment significantly influences the senior housing market, particularly in terms of demand, supply, and future expectations. In 2023, the US economy grew by 2.5%, defying expectations of a recession. This growth was driven by strong consumer spending, which increased by 2.8% annually, and government spending, which rose by 3.3%. Private investment also contributed to the growth, increasing by 2.1%.
The labor market remains robust, with nonfarm payroll employment increasing by 353,000 in January 2024. The unemployment rate held steady at 3.7%, reflecting a strong job market. Job openings remained high at around nine million, indicating continued demand for labor. This strong labor market supports the financial stability of many households, including those of seniors, enabling them to maintain homeownership and age in place.
Inflation has been trending down, with core Personal Consumption Expenditure (PCE) rising 2.9% year-over-year in December 2023, the lowest level since March 2021. However, upside risks remain due to global uncertainties. The Federal Reserve's interest rate policies have kept mortgage rates high, averaging 6.6% in January 2024. High mortgage rates discourage existing homeowners, particularly seniors with low-rate mortgages, from selling their homes and moving, thereby constraining the supply of available housing.
Despite economic challenges, home prices continue to rise. The FHFA Purchase-Only Home Price Index for November 2023 showed a 6.6% year-over-year increase. This increase is driven by strong demand and limited supply, particularly in the large home segment. The reluctance of baby boomers to downsize exacerbates this issue, as their high retention rates keep a significant portion of the housing stock off the market.
The economic context of 2023, characterized by growth, a strong labor market, and rising home prices, presents both challenges and opportunities for the senior housing market. On one hand, the financial stability of seniors supports their preference to age in place, reducing the turnover of homes. On the other hand, the rising demand for senior housing options, driven by demographic trends, creates opportunities for investment and development in this sector.
Future Prospects and Potentials
Looking ahead, the senior housing market is expected to grow, driven by demographic trends and evolving housing needs. By 2030, all baby boomers will be over 65, and a significant portion of the US population will be in this age group. This demographic shift will increase demand for senior housing options, including independent living, assisted living, and skilled nursing facilities. However, this demand may be tempered by the strong desire of seniors to age in place. An AARP study found that most people over 65 want to stay in their current homes, and the number of seniors reporting difficulty in self-care has decreased significantly over the years.
The US senior housing market is at a crucial point, influenced by the aging baby boomer generation and broader economic forces. While the market faces challenges like limited supply and affordability issues, there are also significant opportunities for growth and investment. Policymakers, developers, and investors must carefully navigate these dynamics to meet the needs of an aging population and ensure a balanced and accessible housing market for all generations. The future holds both promise and uncertainty, and the decisions made today will shape the housing landscape of tomorrow.
Sources:
US Census Bureau, Federal Housing Finance Agency (FHFA), National Association of Home Builders (NAHB), Federal Reserve, US Bureau of Labor Statistics (BLS), FreddieMac