We Actually Need to Build More Luxury Homes. Here’s Why

There is broad agreement that the US housing market needs more homes. There is also broad agreement that affordability needs to improve. But it doesn't necessarily follow that we should build more affordable homes.

Stepping up housing production is a multiyear process, which means we should be thinking about what the market will look like in 2030, not what it looks like now. By then, middle-aged millennials in America’s largest generation will be at their peak earning potential, seeking luxury digs or to trade up rather than entry-level or affordable homes. Understanding and catering to these changing needs will ensure the right kind of supply and, counterintuitively perhaps, improve overall affordability.

The starting point is recognizing the age cohort that dominates over time and anticipating their demands. Bill McBride of the Calculated Risk blog tracks these shifts. He pointed out last year that the biggest share of millennials was in their early to mid-20s in 2010, the phase of life when people tend to favor apartment living, and is now in their 30s, the age when people tend to buy entry-level homes.

These millennials have been underserved by residential construction trends this century. The US built a lot of suburban single-family homes in the mid-2000s, not the apartments that appealed to millennials who were just entering the workforce and moving to cities at the time. The 2008 housing bust then led to years of under-construction, followed by a scramble to build the multi-unit housing that developers realized was in high demand. Single-family housing languished with memories of the sub-prime mortgage crisis still fresh.

Now entry-level and affordable single-family homes are in short supply because a decade of under-production has left the market unable to absorb the needs of millennials in their 30s. Developers are once again racing to catch up to that demand, with home sizes shrinking and builders doing their best to fit the budgets of buyers in a high-cost, high-interest-rate environment.