As the economy begins to show signs of improvement, what will happen to the millions of households that have not yet formed or have been forced into new configurations as a result of the Great Recession? Industry experts who gathered to address this question at a ULI Terwilliger Center for Housing forum, on June 21, agreed that the short answer is “it depends”—on a complex, interrelated array of factors. Overall, most participants agreed that while there is no single correct answer for the nation or even for a given state or metro area, there are some common themes.

“The big question,” said ULI senior resident fellow Maureen McAvey, “is how much demand is really out there?” Describing the nation’s “barbell demography,” in which the 81-million-member baby boom generation is being surpassed in size by the 85 million-strong Gen Y (also known as millennials and echo boomers)—the largest generation in American history—McAvey added that the nature of future housing demand will be determined by the behavior of this unconventional and unpredictable generation, whose members are coming of age at a time of enormous uncertainty.

Looking at the numbers of housing units built in recent years, and assuming that approximately 1.3 million new households are being formed each year, McAvey demonstrated how one could predict either pent-up demand of about 800,000 units or an oversupply of about 1 million units. With so many unknowns—including what will happen to the existing “shadow” supply of housing, the uncertain future of immigration and potentially lower birthrates, an unclear split between ownership and rental housing, and changing market segmentation—she argued that the most important questions to ask now are what will affordable housing look like, how large should new housing units be, and where should they be located? Gen Y households, overall, she noted, will be looking for homes that are accessible by transit or other alternative means of transportation, smaller units in complexes or neighborhoods with shared amenities, and homes in urban or urbanizing locations. But, McAvey warned, this will be a far more segmented and targeted group of prospective homebuyers and renters than any we have seen to date.

“It’s hard to know what will happen, in terms of pent-up demand,” McAvey concluded. This “is a good time to do much more sophisticated analysis than we might have needed to do six, eight, ten years ago. Gen Y is a very diverse group. The markets—even within a metro area—are dramatically in flux. Going forward, we will see very different market conditions and, I believe, some paradigm shifts.”

Moderator Nicolas Retsinas, a senior lecturer at the Harvard Business School and director emeritus of Harvard University’s Joint Center for Housing Studies, led a panel discussion that also addressed this topic. David Crowe, chief economist for the National Association of Home Builders, asserted that with the number of household formations tapering off significantly in the past few years, dismal job growth, tight credit standards, low housing prices (which have yet to rebound in most of the nation), and lots of policy uncertainties, future demand also looks rather dismal. There are huge regional differences, he pointed out, and recovery is taking place in some relatively small, geographically dispersed places—but not nationwide.

Richard Koss, director of economics for Fannie Mae, agreed that “all of these uncertainties are acting as a fairly significant headwind to the home purchase market.” Survey results, he added, indicate that Gen Y members still aspire to homeownership, but for distinctly different reasons, less focused on investment potential, than prior generations. Whether these differences will persist when the younger generation can finally afford to buy their own homes—that is, when the labor market improves, and after they have paid down some of their student loan debt and managed to save enough for a down payment—remains to be seen.

Paul Bishop, vice president of research for the National Association of Realtors, focused on pent-up demand as it applies to the youngest generation of potential homebuyers, noting that while a healthy homeownership market requires a steady stream of first-time homebuyers, new household formation among 25- to 44-year-olds today is basically flat. Bishop said he believes that this generation’s lower level of homeownership—which has been caused by its much-constrained ability to purchase a home, due in part to much higher income and down payment requirements—has resulted in significant pent-up demand.
Finally, Urban Atlantic development partner Caroline Kenney illustrated what types of housing Gen Y households are buying and renting by describing three of her firm’s current projects in Washington, D.C. Common features among these projects include smaller units, larger communal spaces, a wide range of amenities, social programming, lower parking ratios, and a mix of land uses.

When Retsinas asked the panel, “why in the world is there still so much demand” for homeownership, the response was that homeownership is still the goal of most individuals—including those in Gen Y—but that their desire to become homeowners has been constrained both by their inability to purchase a home and by their fear that it may be a poor investment in today’s uncertain world. Asked to explore the lasting impacts of the Great Recession, panelists agreed that there will be an ongoing greater sense of caution among prospective homebuyers, and that those households will view an owned home not as “an investment that I live in,” as Bishop put it, but more as a place to live that may—or may not—increase in value over time. Those home buyers will be looking for “the home they need” rather than the best investment they can afford, asserted Crowe, resulting in increased interest in smaller but well-designed homes in the most appealing locations. Members of Gen Y, noted Koss, prize flexibility, fear becoming “locked into their house,” and thus will be slower to become homeowners. Other panelists agreed, noting that increasing job mobility will drive the rental market and result in a lower homeownership rate among younger households for some time.

Retsinas’s final question to the panel—what kinds of government interventions might make sense to stimulate the housing market, “short of ordering our children to leave our basements”—was met with a number of suggestions broadly related to the economy. “Unfortunately,” said Crowe, “I think it’s an indirect employment intervention.” The single biggest hurdle to homeownership right now, he noted, is a lack of job security; more consistent growth in jobs would bring consumer confidence back and start to build momentum.

“We can’t ignore the student loan issue” or the difficulty young households have in saving for a down payment, added Kenney. “There aren’t any magic bullets here,” concluded Koss, “no policy lever that you can pull that will make it all better.” Concurring with Crowe, he agreed that the key fundamental behind housing is employment, and that it will be a long, hard slog to an improved housing market.