In this Macro Musing, we review what underlying demographic trends imply for the 10-year outlook for housing starts and conclude that starts will need to rise sharply to average roughly 1.6 million units per year over the next decade. Driving our conclusion are assumptions about the rate of population growth, the rates at which various segments of the population form households, the vacancy rate, the depreciation rate, and the share of additions to the housing stock that are accounted for by new construction. Reasonable assumptions for these parameters lead to an unavoidable conclusion: there’s a boom out there somewhere! It’s just a matter of when.HT: Real Time Economics
The housing market is still in the doldrums. Home vacancies are elevated. Foreclosures are continuing at a rapid clip. Home prices are depressed and may not yet have reached a trough. As a result, lending conditions remain tight for both buyers and builders, and sales and construction remain depressed. In these circumstances, it’s difficult for anyone to imagine a pick-up in housing activity anytime soon, let alone a boom … but we’re going to help you try!
Despite the current difficulties in the housing market, the U.S. population continues to grow, households continue to form, and the housing stock will have to expand at some point to accommodate them. The only questions are by how much and when? Given the current level of vacancies, one can ask: can’t household formation continue for some time before an expansion of the housing stock is necessary? And if that’s the case, won’t housing starts remain flat for a long time?
That’s a fair question. Here are some numbers. Over the next 10 years, nearly 14 million new households are likely to form. To be sure, some of these households can occupy the existing stock of housing, pushing the housing vacancy rate down from its currently elevated level. But if the housing vacancy rate returns to a normal, pre-boom level — but not lower — the housing stock will have to expand by about 12½ million units over the next 10 years to accommodate 14 million new households.
Here’s where the story gets interesting. Every year, a portion of the housing stock is lost to demolition, disaster, condemnation, and other factors. Over the last decade or so, the rate of depletion has been 0.8% of the housing stock per year....MORE