The recent surge in interest rates and inflation has put the record strength in housing under a microscope. How does record-high inflation impact the housing sector and how will the Federal Reserve’s prospective tightening affect the supply and demand for shelter? We believe that while the rise in interest rates will certainly slow the sector from its recent heights, long-term structural trends in the sector will not be so easily swayed. Here’s why.
Structural trend #1 – Demographics sustaining demand
The baby boomer generation remains the driving force in US national demographics. Therefore, its demand preferences and consumption patterns will continue to have an outsized impact on all market segments—especially housing. This is not a new phenomenon. Older demographic tiers have traditionally had higher rates of homeownership.
There is another age group contributing to favorable housing demand. The size of the 35 to 44 year old cohort, a key home buying and household formation segment, is rebounding after an approximately 25-year decline. An environment of higher interest rates and inflation could somewhat temper this rise.
Structural trend #2 – Lack of supply
Baby boomers are holding on to their homes longer. The general increases in life expectancy and availability of at-home care, along with the significant size of the boomer generation, have resulted in a concentration of real estate ownership in the older generations.