Estimate the number of houses in the US?

estimation guess-estimates Market sizing
New answer on Jun 29, 2020
6 Answers
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PK asked on Mar 22, 2020
Director of Product at PayPal. Based in SF. Worked at Twitter, Yelp, Salesforce, Houzz in the past.

Clarifying questions and assumptions:

  1. Residential homes in mainland US?

  2. Includes condominiums, single-family homes, no hotels etc.

  3. Includes homes for rental and self own

  4. Not including nursing homes

Equation:

# of houses = Demand in the US/(average number of individuals per house)

Approach:

Us population with 1-2 homes + US population with 1 house + US population with rental homes

US population 300M

Majority % of the population that are actually homeowners: 20-70

Assuming this since this is the % of users that will actually buy homes and others will stay in them. (Kids under 20 won’t have enough money, will live with parents or most likely in a rental unit. Folks older than 70 usually in nursing homes or their existing houses or rentals)

Avg. US life expectancy = 80 years

The volume of US residents in 20-70: 50/80* 300M → 190M

Top 10% of the population has around 2 homes

Top 40% has at least 1 house

Bottom 50% lives in rental units

Volume of top 10% ~ 19M

Volume of top 40% ~ 76M

Volume of Bottom % ~ 95M

Assuming an average of 3 per household in the US:

Top 10% have: (19M/3)*2 ~ 13M homes

Top 40% have: 25M homes

Bottom 50% need: 31M homes

Thus total homes: ~ 70M

This number seems lower than the actual number of homes which is approximately 120M. One reason could be that I underestimated the number of homes owned by people above 70 and also a lot of extra homes that are created as condominiums and rental property. Anything I can change in my assumptions or methodology?







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Alessandro
CoachingPlus Expert
replied on Mar 22, 2020
McKinsey & Company | McKinsey Coaching teams | INSEAD coach | 20+ candidates (100% success rate)

Hi Piyush,

I would not worry too much about your estimation error, a 50% estimation error would not be a big deal, you just need to get magnitude of a number.

Interviewer don’t want you to get the exact number, they are more worried about your reasoning.

Looking at your estimation process I think you should pay attention to the question: you are asked to estimate the number of houses (including single family houses and condos).

From your calculation seems you estimating the number of homes, (same as estimating the number of households), rather than the number of houses.

A different approach to this question could be the following:

  • Hypothesis:
    • Avg. household size: 3 people
    • People leaving in single-family house: 70%
    • People leaving in condos: 30%
    • Avg. number of apartments per condo: Avg. number of floors * Avg. number of apartments per floor
      • Avg. number of floors = 5
      • Avg. number of apartments per floor = 5
  • Number of single-family house = Total population * people living in single-family house / household size
  • Number of condos: Total population * people living in condos / households / Avg. number of apartments per condo

Please reach me out if you want to discuss it further,

Thanks,

Ale

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Anonymous replied on Mar 22, 2020

Hi Piyush,

In general very good approach since the most important thing in the estimation case is the right approach and not the right answer!

Your results (70m houses) differs from the actual figure (120m) by roughly 40% or less than the factor 2x, which is already good and acceptable (since it’s not 10x).

This implies, that some of your assumptions could be sharpened.

What’s not yet taken fully taken into account:

  1. US population is already 330m+ which gives you another 10% in your calculation
  2. Condominiums and homes for leisure and rental should be included on top ( +10-20%)
  3. Actual home ownership in the US is not 50% (10% + 40%) but rather 65%, which adds another 15% to your calculation
  4. Regarding the age group of home owners I would rather assume 25-80 instead of 20-70, since 20-25 might still be in college and don’t forget about 70-80 who have the highest ownership rate. This adds another 5% to your calculation

As you see, if you validate your assumptions, you will land at approximately the right number of ~110-130m houses. Anyway, please keep the structure and logic the same for the actual interview.

I hope it helps – keep safe and stay healthy.

Good luck!

André

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Clara
Expert
Content Creator
replied on Mar 22, 2020
McKinsey | Awarded professor at Master in Management @ IE | MBA at MIT |+180 students coached | Integrated FIT Guide aut

Hi Piyush,

Overall agree and, honestly, the most important thing in the market sizing cases is the right approach and not the right answer!

Altought your result is not exactly "accurate", as outlined, is good enaugh. Furthermore, is not the key thing.

However, if you are particularly worried, the key would be to come back to your assumptions and re-think them (e.g., US population is +10% higher than what you had estimated -330 vs 300-, home-owners are actually higher numbers...)

However, and as you can read it you realize, those are things that you are not supposed to know! If they were really relevant, the interviewer would give you some instructions as the interview goes by (e.g., rather take 70% instead of 50%, etc.)

Hope it helps!

Cheers,

Clara

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Daniel
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Content Creator
updated an answer on Mar 22, 2020
McKinsey / ex-Interviewer at McKinsey / I will coach you to rock those interviews

Hi Piyush,

I wanted to comment also, since it's already second question of that type, which you are asking and I feel you have a bit of a wrong focus.

I fully agree with Andre – the right approach and right logic are the things, which count. Your result in this sense is not that relevant, actually. So, focus on building a clear and understandable logic which is not too complex – and you will be fine.

Best,

Daniel

(edited)

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Anton
Expert
replied on Jun 29, 2020
FREE 1st session in November | From Lawyer to MBB | Top in FIT | 10x your structuring skills | Message to get Free Prep Checklist

Hi,

Your approach is indeed a good one.

If you want to master your market sizing skills I suggest that you should focus on segmentations patterns. You can use the following segmentation for market sizes:

B2C:
-Demographics (Age, education, income, family size, race, gender, occupation, nationality)
-Behavioral (Purchasing behavior, customer journey stage, occasion & timing,
customer loyalty & interest, risk tolerance, user status)
-Psychographic (Lifestyle, personality traits, values, opinions, interests of consumers)
-Geographic (Geographical boundaries)

B2B:
-Company characteristics (Industry, company size, number of employees)
-Geography (Geographical boundaries)
-Purchasing Approach (Occasion & timing, customer capabilities, nature of existing relationship)
-Personal Characteristics (Loyalty, risk attitude, user status)

B2G:
-Demographics (Type of agency, size of budget, the amount of autonomy)
-Geographic (Geographical boundaries)
-Government Tier (Federal , State, Local, Quasi-governmental, International)
-Bid type (Closed, Open)

But sometimes you don’t need to segmentation. Here is an example of case that could be solved with high level top down approach - estimate the size of credit card market in the US:
https://www.preplounge.com/en/consulting-forum/how-should-i-approach-the-following-question-estimate-the-market-size-of-credit-cards-in-the-us-6695

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Antonello
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Content Creator
replied on Mar 24, 2020
McKinsey | MBA professor for consulting interviews

Hi, the approach is good and is what you are going to be assessed on. The result should stay in the order of magnitude of the actual number, therefore a x2 or x3 is still acceptable. Be ready to discuss it with your common/business sense.

Best,
Antonello

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Alessandro gave the best answer

Alessandro

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