The Future of Housing Demand: 4 Key Demographic Trends

The age of the suburb is over, and America’s great reurbanization lies ahead, expert says.

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Demographic shifts and changing values will increase demand for pedestrian-friendly, mixed-use communities in both urban and suburban settings, according to John McIlwain of the Urban Land Institute. "The age of suburbanization and growing homeownership is over," McIlwain said in a recent report, "Housing in America: The Next Decade." "The coming decades will be the time of the great reurbanization as 24/7 central cities grow and suburbs around the country are redeveloped with new or revived walkable suburban town centers." This transition will be fueled by the growth of two-person households, an end to baby boomers' suburban infatuation, and public policies designed to stimulate compact development. In his report, McIlwain points to four key demographic trends to watch going forward:

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1. Older baby boomers (ages 55 to 64): McIlwain divides the traditional baby boom generation into two subgroups, with the older group comprising roughly 26 million Americans. Today, many older baby boomers are stuck in their suburban properties because of the real estate bust, which has put them underwater—owing more on their mortgage than the property is worth. But McIlwain says that older baby boomers who can sell their homes aren't necessarily following the road maps of previous generations. "Those that can move are no longer flocking to the Sun Belt, choosing instead to move closer to their children and, more importantly, their grandchildren," McIlwain says.

Noting that they are healthier than their parents' generation, McIlwain predicts that older baby boomers will likely defer transitioning into retirement communities for at least a decade, thereby limiting demand for such facilities. They will instead prefer to purchase condominiums in the "mixed-age and mixed-use communities" of more urbanized settings. "Walkable, urbanized suburban town centers will see an influx of aging boomers," McIlwain says. He points to town centers in Bethesda, Md., and Reston, Va., as examples. "Once the boomers can sell their homes and buy condos, these centers will thrive during the decade ahead."

2. Younger baby boomers (ages 46 to 54): There are roughly 52 million Americans in what McIlwain considers the younger baby boom generation. Although they are now entering their peak earning years, younger baby boomers have significant housing market headaches in front of them. On top of the phenomenon of negative equity, many will have a tough time locating buyers for their suburban homes. "The older boomers sold their suburban homes to the larger population of younger boomers looking to move up," McIlwain says. "The younger boomers now have the much smaller generation X, now in their late thirties to mid-forties, to sell to." This development will work to restrict demand for many suburban houses going forward.

Meanwhile, although younger baby boomers are at the perfect stage in their lives to buy second homes, the housing bust and economic recession have undercut their ability to do so. "Most younger boomers will be unable to afford a second home because of diminished earnings, tight credit, and the lack of equity in their first home on which to draw for a down payment on their second," McIlwain says. "Only those second home markets that appeal to the wealthiest will remain strong, though there may be opportunities for lower-cost but well-designed, smaller second homes."

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3. Generation Y (late teens to early 30s): The real estate bust has had a significant impact on how generation Y's 83 million Americans view homeownership. As they watch millions of Americans lose their homes to foreclosure, the allure of buying real estate has become less powerful, McIlwain said. "They will be renters by necessity and by choice rather than homeowners for years ahead," he says. "They have lost the confidence of prior generations that homeownership is a way to develop wealth." At the same time, many members of generation Y prefer urban settings to the suburbs they were raised in. "They want to be close to each other, to services, to places to meet and to work, and they would rather walk than drive," McIlwain says. "They say they are willing to live in a smaller space in order to be able to afford this lifestyle."