BLOOMINGTON, Ind. — While demand from millennials in Indiana and elsewhere has put pressure on housing markets in recent years, don’t expect that trend to continue, according to a new report from the Indiana University Kelley School of Business.
“Plainly put, a generational housing bubble is on the horizon,” the authors said in Kelley Real Estate Outlook, a new research publication from the Indiana Business Research Center and the IU Center for Real Estate Studies. “New housing built now to meet strong demand may sit vacant in a decade. ”
In their article, “Prepare for a Generational Housing Bubble,” Phil Powell, clinical associate professor of business economics, and Matt Kinghorn, senior demographer at the Indiana Business Research Center, said residential real estate demand is driven in part by population.
“Demographic variables will become as important as interest rates, income growth and construction costs in determining the return on real estate assets,” Powell and Kinghorn wrote. “At present, demographic pressure on housing markets is at its peak. This implies continued strain on supply in the next several years followed by long-run erosion in demand that can only be reversed by high levels of immigration.
“The current bubble in demand generated by millennials will slowly deflate, as baby boomers downsize their living space and age out of the housing market. Falling fertility rates mean post-millennial generations will be smaller.”
Recently elevated demand for homes in central Indiana is real and persistent. In Marion County from 2019 to 2021, a 2.0% annual rate of new household formation more than doubled the 0.8% average rate witnessed from 2013 to 2019 — despite a population decline in Marion County since the beginning of the pandemic.
A rate of new household formation that is greater than the rate of total population growth, though, cannot be demographically sustained, they said. While the rate of new household formation will eventually fall, the volume of houses put back on the market by seniors will steadily increase.
For example, the share of central Indiana homeowners age 55 or higher in 2021 was nearly 50%, up from 36% just 20 earlier. Without a sudden spike in population inflow, residential real estate in Indianapolis must prepare for an eventual peak in demand within the next decade.
The reversal in demand is projected to intensify by the middle of the next decade, when the annual number of homes that seniors add back to the market is expected to be 40% higher, according to an earlier study. This could be offset if policies are implemented that increase the share of seniors who age at home instead of a nursing facility.
Other articles in the new publication include a report on the increasing shortage of affordable apartments and other multi-family housing in the U.S. by Sara Coers, associate director of the IU Center for Real Estate Studies, and an outlook for commercial real estate by Jeffrey D. Fisher, founding director of the Center for Real Estate Studies and the Charles Dunn Professor of Finance and Real Estate.
In her article, “Monitoring the Metrics: Is multi-family running out of demographic runway?,” Coers discussed the continuing rise in the development of higher-cost residential units, versus the shrinking number of people who can afford to live in them.
“There is a gap between developers and renters, with most new rental housing being constructed for a small portion of the population, and all the while, the dollar is being stretched thinner and thinner,” Coers said. “Can we realistically expect American renters to feel like they are falling further and further behind as their housing costs continue to increase? With seemingly more developers creating apartments than ever before, it is like watching more and more people crowd onto a smaller and smaller airplane.”
Coers said it is time to “re-think multi-family as we know it and innovate,” including through the use of new construction methods, new product types and re-engineering or re-sizing living space.
“It will help us re-think the supply and cost sides of the equation,” she said. “We can devise ways to create new supply for a greater percentage of the population, in a broader range of household incomes, without sacrificing the ability of developers to make a profit.”
In another feature of the new publication, Coers and Isaac Hacamo, associate professor of finance, share links to recent research on housing and commercial real estate issues.
“Our goal is to improve outcomes in the real estate research and practice of our community,” said Doug McCoy, the Al and Shary Oak Director of Real Estate, a teaching professor of finance who directs Kelley’s Center for Real Estate Studies. “This new outlook will fulfill its mission by providing a platform to integrate research and provide pertinent information, inspire collaboration and support executive decision-making.”