Morgan Stanley
  • Research
  • Apr 22, 2019

Is U.S. Housing Headed for a Major Renovation?

Why population shifts among Boomers, Millennials and Gen Z could drive a surplus of single-family homes and a shortage of rentals—both of which could spell opportunity for rental REITs and iBuying platforms.

U.S. population shifts from three outsized generations—Baby Boomers, Millennials and Gen Z—are set to remake the U.S. housing landscape in coming years. This generational baton-pass in slow motion will play out across the country—but in very different ways. 

Although Gens Y + Z could fuel a nearly 7% increase in demand for housing, that growth is no match for the estimated 43% increase in supply, as aging Baby Boomers sell their homes.

In some markets, it will create a surplus of single-family homes as aging Boomers return housing stock to market. In others, the growth of the two younger generations means regional markets will experience the most intense demand for rentals in decades.

In the medium-term, however, the shift could mean new opportunities for single-family rental real estate investment trusts (REITs) as well as a rise of iBuying platforms—Internet platforms that acquire, fix and resell homes quickly—and aim to become a new model for faster, more efficient real estate transactions.

In a recent report from Morgan Stanley Research, a collaborative effort between the firm’s economists, analysts and strategists finds that these changes, taken together, could have major implications for U.S. housing in the next two decades.

A Home of their Own

This year, America's 73 million Millennials (a.k.a. Gen Y) will surpass Baby Boomers as the nation's largest generation, but the next cohort isn't far behind. In 2034, Gen Z—which we define as Americans born between 1997 and 2012—will actually overtake Millennials in population.

A recent Morgan Stanley report found that the merging of these two generations will give rise to a “youth boom” that will boost consumption nationwide and help drive demand for housing, particularly rentals.

“Net aggregate demand for rentals could surge 22% above long-term averages over the next 10 years," says Richard Hill, head of Morgan Stanley's U.S. REIT Equity and Commercial Real Estate Debt Research.

While demand for rentals is poised to rise, net aggregate demand for ownership of single-family homes could fall to 54% below its long-term average, as aging boomers sell primary and vacation homes. This divergence could open doors for REITs focused on single-family rentals, helped by the rise of iBuying platforms that streamline real-estate transactions. 

Not Their Parents Housing Market

Historically, as people age through their 20s and 30s, they are at the peak age for household creation and demand for shelter. To use one statistic as an example, the 22 million people who are currently between the ages of 20 and 24 will add 3.6 million new households over the next five years, assuming headship rates follow historical trends.

Indeed, the sheer size of the two younger generations will create robust demand for housing—both rentership and ownership—in the short term.

But according to James Egan, Co-head of U.S. Securitized Products Research and member of the firm’s Housing Strategy team, over the next two decades a more nuanced picture emerges. Although Millennials and Generation Z will drive housing demand, much of that demand will be in rentals since those under 40 are more likely to rent. 

Meanwhile, supply from the aging Baby Boomer population will begin returning to market.  “We actually expect supply to increase, not just from new homes being built, but from the existing stock of housing being returned to the market by aging Boomers."

A Lurking Shadow Inventory

To be sure, Baby Boomers—some of whom own multiple homes—are holding onto their houses longer than they did in the past, creating a shadow inventory that often gets overlooked.

“Because Boomers have held onto their homes longer, fewer homes have come on the market over the past several years, exacerbating the shortage of inventory," says Egan. “On the flip side, it means that Boomers have a lot more housing to potentially put on the market, as they age into their late 70s and 80s."

Aging Baby Boomers (+65 year-olds) Have Created a
Shadow Supply of Single-Family Homes

Source: U.S. Census, Morgan Stanley Research

Putting the two trends together, although Gens Y + Z could fuel a nearly 7% increase in demand for housing, that growth is no match for the estimated 43% increase in supply, as aging Baby Boomers divest themselves of their homes.

Growing Divide Between Cities

These trends could be magnified on the local level, as migration trends create an even greater disparity in price appreciation between hot and tepid markets.

One way to gauge future demand? A closer look at markets where Boomers outnumber Millennials. New England and the Rust Belt, for example, have far more Boomers than Millennials, while the trend reverses in the West and Southwest.

Boomers Outnumber Millennials in New England and
Rust Belt, but Vice-Versa in West and Southwest

Source: U.S. Census Bureau, Morgan Stanley Research. Note: For the purposes of metropolitan statistical area (MSA) levels, chart uses current populations of 25-39 year-olds.

The analysts also looked at supply and demand dynamics for home ownership at the metro level. After factoring for regions that are seeing net in-migration of Boomers to retirement destinations, they identified cities best-positioned for rising home prices over the next decade. Demand for homeownership Austin, Texas, for example, is likely to be significantly higher than the national average. Contrast that with Barnstable Town, Mass., which may see a greater decline in ownership than the national average.

Nationally, renter demand will remain robust over the next 10 years, with Gen Y and Z migration patterns as the biggest factor. 

iBuying Bridges the Gap

The increase of single-family home supply and the rise of iBuying platforms may mark the most significant shift, driven by generational change. To date, single-family rentals—which account for about 40% of all U.S. rental units—have traditionally been the domain of “mom and pop" investors.

That could be set to change. Institutional ownership has picked up from virtually nothing a decade ago to an estimated 2% of single-family rental units. As more Boomers list their homes, however, single-family REITs could scoop up inventory. “If they buy just 15% of the roughly 12 million homes we project to be sold over the next 10 years, they'll grow from 300,000 homes to nearly two million," says Hill.

Historically, institutional buyers haven’t been able to manage portfolios comprising millions of properties. But now, so-called iBuying companies could streamline the process. 

Morgan Stanley Estimates the iBuying Market Could Reach ~3% Total Transaction Penetration by 2030, the Equivalent of ~175k Homes

Source: Company data, Morgan Stanley Research estimates

iBuyers use web-based detailed questionnaires and home-value algorithms to make offers on homes, sometimes within 48 hours. The iBuyer then assumes ownership, makes the necessary repairs, and preps the home for resale. The report notes that this new model for real-estate transactions could account for 3% of U.S. existing home sales by 2030.

“3% might seem small in percentage terms,” says Brian Nowak, Head of U.S. Internet Research, “But given the large size of the residential market, which is around six million transactions a year and $1.8 trillion in transaction value, it means iBuyers would purchase roughly 175,000 homes in 2030.”

Although the iBuying model will face hurdles to adoption, such as high importance of referrals, local knowledge and transaction complexity, if the platforms can change consumer behavior and show they remove real-estate friction, they could further alter the future of U.S. housing. 

For Morgan Stanley Research on the U.S. housing market, ask your Morgan Stanley representative or Financial Advisor for the full report, “How Gens Y + Z - Aging Boomers Reshape U.S. Housing" (March 27, 2019). Plus, more Ideas from Morgan Stanley's thought leaders.