Hi! I’m Aziz. My newsletter contextualizes America’s housing market using data visualization—hit reply and let me know what you think.

The inventory of homes for sale is mired near the lowest level on record. A widely-cited culprit is the “mortgage lock-in” effect (people don’t want to move and lose their cheap mortgages). But that’s not the whole story.

Several other factors are depressing supply.

Prices soared during the pandemic and affordability is now a bigger problem. Most existing homeowners have a cushion of equity, but because prices are so much higher, even “moving-up” can be prohibitively expensive. Fewer buyers means fewer sellers. Moreover, whereas worsening affordability would normally drive homeowners into the rental market (freeing up some inventory for sale), rents have also soared, making this strategy less appealing.

But this is a bigger problem. The supply of homes for sale has been relatively low for years, and predates the pandemic and soaring prices, rents, and mortgage rates. So—in addition to these recent factors—we should be looking for good long term explanations for low supply.

One compelling possibility is that people are staying in their homes for longer than they used to (“tenure” is high). Maybe this is because home sizes have grown larger even as the number of people in the average household has shrunk, resulting in fewer families needing to move to a larger home as they grow. There is evidence for this: households headed by 45 to 54 year-olds—i.e., those that might typically be expected to upsize—have instead exhibited the sharpest rise in tenure of any age cohort (measured over the past 60 years).

But an even more persuasive explanation is that older Americans are choosing to stay put for longer—they’re “aging in place”. That means they’re not moving in with family, into nursing homes, or into smaller homes or rentals. In short, they are not supplying the market like they used to.

This trend should continue: as more Americans age into the 65+ demographic, pressure on supply will intensify.

The questions in the Census Bureau’s annual survey of the population often change, but one that the Bureau has asked in a relatively constant format since 1960 pertains to homeowner “tenure”—how long an individual has been at the same residence.

An analysis of tenure over the years yields some unsurprising results: younger homeowners move more frequently than older ones. This makes sense, since their families are growing and they are undergoing more life events (like career changes than necessitate relocation) compared to older adults.

But some other results of this analysis are less intuitive. In particular: all age groups are staying in their homes for longer, and the increase in tenure is more striking for older households which had higher tenures to begin with.

But even if every age group had shown a steady tenure over time, tenure for the overall population would still be rising. This is because older people stay in their homes for longer, and the share of the older population in the total population is rising.

This raises an interesting question: how much of the rise in tenure is because of a behavior change (people staying in their homes for longer), and how much is due to demographics (people aging into cohorts that have always exhibited higher tenure)?

In 1960, just over 30% of homeowners had lived in their home for ten years or more. In 2021, that figure was twice as high. Americans aged 65+ have contributed more than half of that increase, even though they account for less than 20% of the population.

Part of the explanation is that older Americans are staying in their homes for longer than they used to. But this is a far smaller driver of the overall increase in homeowner tenure than the simple fact that the over-65 crowd have always stayed in their homes for longer than younger households, and that the number of over 65s in the general population has quadrupled from 15 million to 60 million since 1960.

Looking ahead

There are a number of reasons supply could rebound:

• If mortgage rates decline, the “lock-in” effect will too

• If rent growth is subdued over the coming years compared to homeownership monthlies (a function of mortgage rates and home prices), some homeowners will be enticed to sell and move into a rental property (a net gain of supply, since sellers would not be buyers in such cases).

• Some of the moves during the pandemic could reverse. A higher than usual number of homeowners, especially younger ones and of lower incomes, report expecting to sell their homes within 2 years, according to a recent Fed survey.

But against these possibilities, there is a certainty: the share of Americans over 65 years old is set to grow by 8 million over the next 5 years, even as the number of people under 65 stays the same. Since older people hang onto their homes longer, supply will remain under pressure from demographics, if nothing else.

45 to 54 year-olds are also staying in their homes longer, and the percentage of that group staying in their home for ten years or more has grown more rapidly than for over 65s. But the rising tenure of the older cohort has a much larger impact on supply.

Consider what over 65s would be doing if not aging in place: moving in with family, moving into nursing homes, or into smaller homes or rentals. Unlike the rising tenure of 45 to 54 year olds—which dampens listings but has no impact on the quantity of housing for potential homeowners—the rising tenure of the over 65s result in foregone additions to net supply.

If housing is a game of musical chairs, rising tenure for middle aged households means the music stops. Rising tenure for over 65s means the music stops, but that there are also fewer chairs.

Consequences

As Jessica Lautz, the deputy chief economist of the National Association of Realtors, recently told The Hill, “boomers are not downsizing and Millennials—first-time buyers in particular—are buying later in life. This puts both generations of buyers in head-to-head competition for similarly sized properties”.

Millennials are not well-placed to win these competitions. Typically, 70% of them are first time buyers and therefore have no home equity to contribute towards the higher purchase prices fostered by reduced supply.

These realities should also add urgency to policies to boost the quantity of housing. Constrained supply is partly a function of today’s high interest rates and other short term factors, but demographics suggest this is a long term problem that can only be addressed with substantial and long term solutions.