The Implications of an Aged Housing Stock

U.S. housing is in an interesting spot.  The housing stock is increasingly aged, housing starts are only just beginning to catch up with the long-term average, and mortgage rates are much higher than they have been for years, making homeowners (some 40% of whom now own their homes outright*) reluctant to sell.  These factors combine to make for an interesting setup for all sorts of housing-related construction and services as the housing market works to find an equilibrium.  Let’s first look at the data:

From 1959 through 2007, housing starts for single family homes in the U.S. averaged more than 1.1 million per year.  The housing bubble and subsequent bust that was largely responsible for the 2007 – 2009 financial crisis resulted in depressed housing starts for more than a decade; in fact, from 2008 through 2019, single family housing starts averaged just 660,000, not even 60% of the long-term average.  Housing starts are only now beginning to catch up to the long-term average:

As a result, the housing stock in the United States has become very old very quickly:  more than 60% of single family houses in the United States were built more than 35 years ago:

To complicate things further, homeowners are more frequently electing to stay in their homes for longer, due to reasons such as that they own the home outright and do not wish to hold a mortgage, or the current housing shortage means they would not receive more value in moving to a new location for the increase in costs incurred.

These trends have large implications for investors, and I wanted to highlight some of the segments that stand to benefit from them.

Remodeling / modernization:  Many, if not most, of the homeowners electing to stay put are of the baby boom generation, now in their retirement years, and typically close to their peak wealth due to a long bull market in stocks, and with their houses most likely paid for.  This wealth effect paired with an aged residence makes for a strong setup for remodeling or modernization of a home’s infrastructure.  In 2023, Fortune Brands Innovation’s Nicholas Fink remarked that:

“[The average home is over 40 years old, and homes built during the early 2000s boom are coming into prime R&R [repair & remodel] age.  Additionally, the baby boomer generation continues to prefer aging in place and investing in their homes, while millennials and other first-time homebuyers are purchasing homes in need of upgrades due to limited available inventory and affordability concerns.  These demographic trends are all supportive of repair and remodel.”

These modernization projects can obviously cover a lot of different things, but a few that stand out to me as especially interesting are water-related infrastructure such as “smart showers” and improved digital meters (the EPA estimates that the average house wastes up to 10,000 gallons of water a year), energy efficiency (this can be anything from better windows and insulation to more modern HVAC systems), and composite materials as a longer-lasting replacement for wood in things such as decks.

Pest control:  As houses age, the need for pest control rises, mainly due to such factors as outmoded construction materials and design, cracks in foundation walls, siding, and so on.  This only serves to reinforce a long-term trend that has been in place for decades:

Plumbing:  Plumbing is a critical service that should benefit from older houses with older pipes.  These can range from simple calls related clogged drains to more complex issues such as backed up sewers.  Plumbing services is severely fragmented, leaving industry-wide data hard to come by, but we can glean some insight from Chemed, which owns Roto-Rooter, the nation’s largest plumbing company.  Since 2005, Roto Rooter’s revenues have compounded at about 6% per annum, a rate above nominal GDP over the same period.  For reasons we have already listed, this rate of growth for plumbing services seems set to continue.

Until the housing market finds a new equilibrium in which housing starts reliably stay at a level needed to meet demand, and homeowners feel confident enough that selling their house in order to upgrade will justify the added expense, the trend toward aging in place and spending wealth on improving living quarters seems to have many years yet to play out.

 

 

Disclosure:  Both the author and clients of Fortune Financial Advisors, LLC, own shares of Chemed.

 

 

 

*via data.census.gov