Arthur C Nelson: Two Factors - Age & Demographics - Are Impacting Housing Market Patterns of Choice

Arthur C Nelson: I have a trick question I give my students every year: What is the most sprawling metropolitan area in the country, and what is the most densely populated metropolitan area in the country? They get the first part of it right, except Los Angeles is also the most densely settled metropolitan area in the country. When students realize that they think about what’s wrong with this picture. There’s nothing wrong with the picture; it’s just a matter of perception. I try to teach my students to look at what is going on and to look to the future. 

We know that roughly 80 percent of Americans prefer to live in single-family detached homes. Also, the same figure applies for the Germans, French, and Chinese—it turns out the humankind prefers a single-family detached dwelling to alternatives. When we make choices in where we live, we chose between neighborhoods, communities, commuting times, and attributes. So what we want, maybe, is different from what we choose. I want to talk about emerging patterns of choice. 

The idea of my work is to have us think about the future. That doesn’t mean engineering the future, but, rather, what is the future going to be? And how do we meet those challenges? We have a lot of things going on in this country. We have demographic changes, an aging population, and the baby boomers are the pig in the python. We’re moving through society, and at every stage in our lives we change America. 

We also have economic changes. It may very well be that we will end this decade with less per capita income than we started the decade with. Because of local competition for jobs and local development, we could continue to see the decline of real income in America. 

We also have financial constraints. It’s harder today to buy a home than in 2005. In 2005 my cat in Alexandria, Virginia got an offer for a $250,000 loan with better terms than I have. Those days are gone, thank goodness, but I think we’re seeing a backlash. Maybe we’re moving too far into the underwriting constraint area for buying homes. 

We also have changing preferences. People are looking around, saying, “well, you know I actually like some things that I hadn’t thought about before.” The more we see options out there, the more people are looking at changing their preference patterns. 

We ended the decade with about a 56 percent homeownership rate in California versus about 65 percent across the rest of the nation. This trend holds, except I find something very peculiar going on. In California you added about 1 million households for the state, and there was a 495,000 growth among homeowners in California. This means in California the share of additional households is 45 percent homeowners. The emerging rate of homeownership in the state is ten points lower than the average homeownership rate for the 2000s decade. Yes, we had the recession, but on the other hand in California it’s more difficult to foreclose a house than any other state in the country. Therefore, over the decade only 45 percent of the additional households in the state bought homes. 

We also know that the propensity of people to buy homes increases as they age, and then it begins to tail off. People will buy homes to build families, then that propensity falls off until about they’re in their late sixties and early seventies, when more people begin selling off their homes instead of buying homes. That is one of the messages I have in my report. This age group between 35 and 60 is the most likely age group to buy homes. They have the means (money), they have the motive (space for the family), and they have the opportunity with new subdivisions and housing opportunities. 

We also have a changing population. We’re seeing for the US, California, and Los Angeles, the share of household growth in the major racial-ethnic groups. White non-Hispanics will be about 30 percent of the growth in the US between 2010 and 2030, with declines along the way. We’re looking at the population becoming more diverse and less white non-Hispanic. Unfortunately, we’re not going to be able to afford—because we chose not to do so—to educate the minority populations to be globally competitive and to have the wages to buy our own homes as we retire and move on. 

We’re going to look back at this particular period of time and realize this was the golden era of education in this country. We are cutting, slashing, and eliminating education across the United States. My state, your state, other states. I think this gap will keep increasing, which means, of course, that our minority populations will probably earn less average per capita income than we do. This means there will be fewer homebuyers in the future unless home prices continue to fall below where they are now. 

If I take the home ownership rates by racial groups in 2010, hold them steady, and then apply those rates to each of those groups to the year 2030, I see that home ownership rates collectively will drop from 65 percent in the US to 63 percent in 2030.

These demographic changes are taking place, and they hold implications for ownership. We also are learning from preference surveys and are getting a sense that the population would prefer something a little different from what they have now. 

More than half of Americans and Californians would prefer to have a small home with a short commute. About 40 percent or so would even choose an apartment or some attached product to have a walkable community and a short commute to work. What’s stunning to me is that where about half of Americans want a transit option in their neighborhood, about 71 percent of Californians want that option. 

“The New California Dream: How Demographic Trends May Shape the Housing Market” Arthur C Nelson’s full report is available at 

<http://www.uli.org/ResearchAndPublications/~/media/ResearchAndPublicatio...

Executive Summary

This report offers a scenario for how the use of land in California’s four largest metropolitan areas may be reshaped between 2010 and 2035. Taken together, these four metropolitan areas house 80 percent of the state’s population. The scenarios for 2020 and 2035 are based on current understanding of demographic, economic, and financial trends; on emerging market preferences revealed through surveys; and on an assessment of redevelopment opportunities in currently developed urban and suburban areas.

The report makes five principal findings:

First, the existing supply of conventional-lot (over one-eighth acre), single-family detached homes exceeds the projected demand for these homes in 2035. This finding does not mean there is no market for new conventional-lot homes in niche markets. It does mean that overall the expansion of the supply of conventional-lot, single-family detached homes would be in excess of current and projected demand.

Second, housing and neighborhood preference surveys indicate that Californians consider transit options to be far more important in choosing a location in which to live than the rest of the nation: 71 percent in California, compared with 47 percent nationally. The demand in 2035 for residences located within one-half mile of public transit stations—called transit-station areas, or TSAs—will exceed the aggregate amount of current supply plus all new residential units built in these metropolitan areas between 2010 and 2035.

Third, through modest redevelopment that will happen anyway, existing developed land with nonresidential uses could be sufficient to accommodate all new jobs created over this period. In particular, existing and potential TSA development may have sufficient capacity to accommodate 7 million jobs, or more than enough to absorb all new jobs between 2010 and 2035.

Fourth, changing demographics in combination with changes in home mortgage finance will reduce the rate of homeownership in California by up to 5 percent from 2010 levels and perhaps by as much as 10 percent over the long term. A 5 percent reduction represents a market condition where three-quarters of the demand for new housing in the state’s largest metropolitan planning organization (MPO) areas will be for rental housing. This demand should lead to an increase in existing residential units being used to house multiple or intergenerational households as well as to a variety of hybrid or new housing formats, such as accessory dwelling units or new nontraditional multifamily housing options.

Fifth, these long-term market trends represent a directional alignment between the real estate preferences expressed by consumers and the greenhouse gas reduction objectives expressed by the state of California in the form of Senate Bill (SB) 375.

Although this report presents one of several conceivable scenarios that can be envisioned for these four California MPOs between 2010 and 2035, it is based on best available evidence with respect to demographic, economic, and financial trends and consumer preferences. Nonetheless, as additional census and other data become available, and as economic, regulatory, and financial conditions continue to evolve, this scenario will need to be revisited.

The bottom line is that as many as 9 million households would like the option to live in locations served by public transit, but today only about 1.2 million California households can claim to have it. Even if all new homes built between 2010 and 2035 were built in TSAs, several million households would be left without the TSA option they want. In addition, existing and planned TSAs appear to have the capacity to absorb all new jobs that would typically be attracted to TSAs and about two-thirds of all new housing units between 2010 and 2035.

The question this report does not address is whether and how the land use regulations in the state’s largest metropolitan areas can be restructured to facilitate planning and development processes that would allow absorption of this market demand in TSAs. Additional challenges must be overcome beyond facilitating the strong market demand for transit-accessible land uses. First, land use regulations must be proactively altered to “receive” this market demand. Second, although the public sector may be wary of investing the resources necessary to upgrade the infrastructure needed to meet current and growing demand, ways must be found to do so. Only through new public/private partnerships can these two challenges be surmounted.

This report does affirm a consequential observation that by meeting emerging market demands, California’s largest metropolitan areas will be shaping their markets in a manner that conceivably allows them to comply with SB 375. Although this report outlines a market-driven development scenario for 2020 and 2035 that may be loosely consistent with the objectives of SB 375, it does not prescribe how California’s major metropolitan areas can or should meet those performance objectives. Local governments working with MPOs must find the most practicable ways in which to do so. Nonetheless, market forces seem to be heading in the direction of helping—rather than hindering—actions that achieve accord with SB 375.