by guest author Peter Fugiel, Ph.D.
Strong demand for housing – coming both from younger households and from continuing strong immigration – could lead the U.S. housing markets into a huge expansion through the middle of the new century. At least at this point, in 2010, strong U.S. population growth is expected to continue to the year 2030, and more than likely, to mid-century as well.
So why all the pessimism in the press? We need to recognize that the statistics are pointing to a new paradigm that helps explain the U.S. residential markets.
Baby Boom to be replaced by new wave of immigrants and their families
The life cycle of the huge baby boom cohort confused the press over what factors to watch in the housing sector. The recent run-up in home prices was the story of this maturing generation ’trading up.’ But as the country continues to grow through mid-century, and as the demand for housing remains strong, the key market number to watch will be sales volume – not price. The continuing strong sales trend (over 5 million in 2009), even at the height of the price decline, shows that the demand is there.
The following nine technical housing indicators explain what has happened, and what is expected to happen in the U.S. housing markets over the next generation.
1. Excess home sales volume in the past decade was churning, not demand.
Between the years 2000-2006, there was a marked increase in the number of home sales, as a record number of owner households ’leveraged up.’ In other words, owners took their capital gains, cashed out, and bought another home. The excess amount of ’careless’ capital in the housing market made such churning possible, as long as price increases seemed to justify the churning. The ’federal’ agencies, which served as conduit for private mortgage products, were the key to rapid increase in home sales and market churning.
Number of existing home sales: 1971-2010:
- 1971 – 2 million
- 1976 – 3 million
- 1978 – 4 million
- 1998 – 5 million
- 2003 (height of the price bubble) – 6 million
- 2004 (height of the price bubble) – 7 million
- March 2010 – 5.3 million
Source: National Association Realtors, from “Calculated Risk Finance and Economics”
2. Continued high sales volume in the past several years shows the real demand.
The strong sales trend between 2007 and 2009, (over 5 million home sales,) even when there is a marked slowdown in the percentage of U.S. households who move each year, indicates that a large, younger population will continue to translate into strong demand for U.S. housing.
There is some justification for sales volume to drop well below 5 million, based on the decrease in the U.S. household relocation rate.
3. The recent fall off in household formation is temporary.
The recent, post-financial-collapse of the economy has caused a substantial fall-off in the estimated number of new household formations, perhaps in the range of 1.5 million. That only stands to reason, with high rates of unemployment and underemployment. However, when the economy begins to recover, households will once again be formed by younger adults, who usually start out in the rental market, and then begin to own homes.
4. Federal subsidies to starter households will be replaced by cheap bank inventory.
The press has been full of recent warnings about how the federal ownership tax subsidies will result in a fall off in home purchases. There is also concern about the huge unsold unit inventory, which will only be made worse by bank disposition of troubled assets. And if anything, deeply discounted bank housing inventory will come at a price that starter households can afford.
5. High levels of sales volume have continued, even with the steep decline in the U.S. mobility rate.
The percentage of U.S. households that moves each year was a hallmark of the first round of U.S. suburbanization that occurred after World War II. One of every five households was moving every year, as young adults formed new households by moving to the suburbs. By the 1980, however, the mobility rate in the U.S. began to drop substantially. It has continued to fall, even as the home sales volume increased sharply due to price churning. It is clear by now that home sales volume has been strong in the U.S., due to population growth -despite the decline in the country’s mobility rate.
Moving is Out …. Commuting is In
Share of U.S. Population Changing Residence
6. Record demand for affordable housing will favor rentals and discourage abandonment.
Because the demand for housing in the next 40 years will be extremely sensitive to the cost of housing, the demand for rental housing is expected to be very strong. However, as long as national housing and tax policy favors owner housing over investment housing, rental housing will be too expensive for many households to afford. Once the federal mortgage interest deduction is capped, and some of the savings are re-directed to the re-capitalization of the rental inventory, rental housing will become both more desirable and more affordable. Those locales with rental housing will for once, have housing that is maintained, appealing, and profitable. This is assuming of course, that those localities view their rental housing as part of the community’s ’social infrastructure.’ The property tax burdens on rental housing have to be re-evaluated.
7. The increase in the household formation rate can exceed the rate of population increase.
Probably the most promising aspect of the long-term demand for rental and owner housing that is affordable is the fact that in good times, the housing formation rate exceeds the rate of population increase. In other words, exiting households ’uncouple.’ The high rates of single-member households in most center cities is based on the fact that young, retired, professional, and affluent households tend to be much smaller in size. The fact that modern lifestyles encourage single-member households is extremely positive for urban, high density, and well-located housing units.
Probably for the first time in over 80 years, a unit’s location will be more important than its economic status.
8. Will it be 436 million or 398 million Americans?
The U.S. Census has been very adept at projecting population out beyond thirty years. The biggest unknown right now is how much additional population there will be between the years 2030 and 2050. Originally, it was thought that, after the year 2030, many home markets would have a surplus of housing units, as the baby boom aged and passed. But with record immigration continuing, it is more than likely that the long-term demand for housing will remain strong, as the baby boom is replaced by recent immigrants and their larger families. And even if illegal immigration were to be halted, the bulk of immigration growth, with more that a million legal immigrants arriving on our shores every year, will continue on, as it has through the long history of the republic.
9. “Price is out; place is in.”
Probably for the first time in over 80 years, a unit’s location will be more important than its economic status. This is a fundamental shift in the U.S. housing paradigm. The widespread acceptance of commuting in the U.S. is slowly being replaced by a preference for a lifestyle that is community-based. As Americans move less often, their allegiance to community is growing. As a result, many mainstream communities will be able to take advantage of the new American value of preferring place over status. Mainstream communities will be able to reposition themselves, based on their better locations, their housing affordability, or both.
Editor’s Note: The opinions expressed within this article are those of the author, and may not necessarily reflect the views of RICIC, LLC or MuniNetGuide.
About the Author:
Peter Fugiel, Ph.D., is a frequent contributor to MuniNet Guide. Peter has followed the national housing markets for 31 years. Peter has conducted extensive inter-market, inter-local, and sub-market housing research for the past eight years. His specialty is using realtor trade group statistics to monitor sub-market trends, including analysis of the ’value pecking order’ that is emerging in buyer-driven local markets. Peter holds a Ph.D. in government and is a public finance/housing consultant in Chicago.