Rent, own, rent life cycle builder problems.

In the United States, it is customary for households to start off by renting; then buy a “starter” home; move up into large homes; and then, as they age, sell their homes and move into smaller ones, whether owned or rented.

As households age their propensity to rent decreases, while their propensity to buy increases. After about age seventy five, though, when they relocate, the propensity of households choosing to rent increases to nearly 60 percent. Because roughly 5 percent of all elderly households relocate annually, and as their numbers will nearly double between 2010 and 2030, the aggregate demand for rental housing serving this group is likely to more than double.

However as people age they tend to move less. So even though there is a shift to renting (for those who move), there are many older people who also stay in their large homes. The propensity to rent doesn't exceed the propensity to buy until after age 75.

Homeownership declines significantly after people turned 70 but still stays above 80% for those in the 70 to 75 age group.

Expect the homeownership rate to remain high for the boomer generation, (15 years or more) although there will probably be a geographic shift as the boomer generation retires (towards the sun states) and some downsizing.

There were over 2 million excess units in 2005. That needs to worked off first,then there will be a need for 30 million new housing units over the next 15 years (with many more single person households).

This has huge implications for builders. Home builders will only have to build about 800 thousand (on average) single family units per year through 2020 (after the excess is worked off). This is far below the 1.25 million per year seen in 2004 and 2005. That level of production is not coming back.

In 2007: Home Builders (With the rising homeownership rate) had the wind to their backs. Instead of 800K of new owner demand per year (plus replacement of demolished units, and second home buying), the homebuilders saw an additional 500K of new owner demand during the period 1995 to 2005. Not including the extra demand from speculative buying. Some of which was satisfied by condo conversions and owner built units.

Looking ahead, if the homeownership rate stays steady, the demand for net additional homeowner occupied units would fall back to 800K or so per year (assuming steady population growth and persons per household). However the homeownership rate is declining, and this is now a headwind for the builders.

It appears the rate is declining at about 0.33% per year. This would mean the net demand for owner occupied units would be 833K minus about 333K or 500K per year - about 40% of the net demand for owner occupied units for the period 1995 to 2005.

This means the builders have two problems over the next few years: 1) too much inventory, and 2) demand will be significantly lower over the next few years than the 1995-2005 period, and even when the homeownership rate stabilizes and the inventory is reduced, demand (excluding speculation) will only be about 2/3 of the 1995-2005 period.