Demographic Shifts and the Haunted U.S. Housing Market
Declining population growth may be a bigger threat to housing than supply shortages.
1The Demographic Shift
David Kelly of J.P. Morgan argues that the U.S. housing market faces a structural shift driven by slowing population growth. He projects annual population increases of only 800,000, suggesting a need for just 320,000 new housing units annually. This contrasts sharply with the million units required during the century's first two decades.
2Challenging Supply Narratives
While Zillow estimated a 4.7 million home shortage as of July 2024, Kelly maintains the country is in a state of net excess supply. Rental vacancy rates have climbed from 5.6% to 7.3% over four years. Recent data confirms that residential construction has declined in eight of the last ten quarters.
3Immigration and Labor Impact
Net international migration dropped to 1.3 million in the year ending July 2025, down from 2.7 million previously. Kelly notes that rising deportation levels are effectively offsetting legal immigration gains. This labor scarcity, compounded by competition from data center construction, continues to drive up material costs and construction worker wages significantly.
4The AI Infrastructure Squeeze
The boom in AI-related capital spending is diverting critical resources away from residential housing. Spending on data centers surged 73% to an annual rate of $85 billion through August. Kelly expects this resource squeeze to intensify by 2027, further complicating the cost structure for homebuilders already struggling with high material prices.
5Buyer Traffic and Sentiment
Buyer traffic has hit its lowest level since April 2012, excluding the pandemic era, with 43% of builders resorting to price cuts. Housing starts are projected to fall to 1.24 million by 2027. These indicators suggest that demand is cooling faster than many market participants previously anticipated during the earlier housing cycle.
6The Mortgage Rate Reality
Current 30-year fixed mortgage rates averaging 7.32% are often viewed as high, yet they remain below the 50-year average of 7.68%. Kelly characterizes the 2008-2021 period of 4.15% average rates as an anomaly. He suggests that rates are unlikely to drop significantly below 7% unless the economy enters a formal recession.
7Barriers for Young Buyers
Homeownership rates have declined since 2022, with the sharpest drops occurring among individuals under age 35. This trend is attributed to a combination of stringent lending standards and the difficulty younger generations face in accumulating down payments. Consequently, many young people are postponing marriage and family formation in their own homes.
8Future Market Outlook
The housing market remains haunted by the legacy of easy money and shifting policy environments. With the Federal Reserve potentially nearing the end of its rate-hike cycle, the sector faces a period of adjustment. Kelly warns that personal housing nightmares will likely persist as the market reconciles with these new demographic realities.
Original article: Fortune | FORTUNE — Demographic Shifts and the Haunted U.S. Housing Market