Population Growth and Housing

In last week’s economic commentary, I discussed the latest population estimate for the 380 metropolitan areas from the Census Bureau. In 2016, close to 280 million people, or almost 90% of the U.S. population, lived in these large population centers. For all practical purposes, most of the economic activities in the U.S. are happening in these large population centers, and that makes these metropolitan areas very important to understand. That is also true for the housing market. Based on the latest HMDA data from 2015, these metro areas accounted for around 80% of the single-family purchase loans originated. In fact, over time, the fraction of people living in the top 50 metropolitan areas has been steadily increasing as better job opportunities and amenities are offered.

These metro areas are also granular enough to for us to understand where people and families are moving. America is a geographically mobile country. People move in search of better jobs, cheaper cost of living, and better climate. An important long-term trend in the U.S. population has been the migration of people from the Northeast and the Midwest to the South, Southeast, and West. Texas, North Carolina, and Florida have been the most notable winners in this trend. Looking at the past 20 years, Texas had four metros in the 10 fastest-growing metros, North Carolina had two metros, and Florida, Nevada, Georgia, and Arizona each had one. At the other end of the scale, eight metros in the 10 slowest-growing metros came from the Midwest and the Northeast. Major metros from Ohio, Michigan, Wisconsin, Illinois, and Pennsylvania have experienced population declines or very slow growth. This migration trend can be very powerful over time. Based on data between 1996 and 2016, populations from the 10 slowest-growing metros have grown by less than 10%, but populations from the 10 fastest-growing metros have grown 67%. Other things being equal, this would make housing markets in the faster-growing metros much larger over time. Some lenders are repositioning their geographic footprint because being in a fast-growing metro area or state can help their business grow faster. They are also where more of their potential employees are, or are planning to move.

The size of the housing market is not the only thing impacted by population growth. Faster population growth can also result in faster home price appreciation if supply does not, or is slow to, catch up. In fact, we see many metros with fast population growth at or near the top of the list for home price growth, and metros with slow or no population growth at or near the bottom of the list for home price growth. Over a 20-year period, we see significant differences in home price appreciation across metros. The top 10 metros saw home price appreciation at a compounded rate of 5.5% a year, while the bottom 10 metros saw home price appreciation of just 2.1%. If two homebuyers had purchased homes with the same home value―one in the average top 10 metros and the other in the average bottom 10 metros―the home from the top 10 metros would be worth almost twice as much as the home from the bottom 10 metros after 20 years. Since home equity represents the largest component of wealth for most Americans, this difference in growth rate is significant for wealth inequality across the country.

But, the impact of population growth on home price growth is more complicated and other factors come into play. For example, only one metro from Texas―Austin—made it into the top 10 list of fastest home price growth, yet five metros from California made the list. State and local government policies can have significant influence on housing supply through building and zoning regulations. Heavier regulation is one reason why large metros on the West Coast and in other parts of the country tend to have faster home price growth and less population growth despite having great climate and dynamic companies offering good jobs. So apart from population growth, how governments react to population growth is also an important factor in understanding the housing market.