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American housing market is slowly recovering momentum
By Shawn A. Mesaros |
May 8, 2013, Wednesday
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Print Edition
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PROPERTIES in America are hot for Chinese investors, but what can we expect as the "new normal" for housing in the United States?
The American housing recovery is absolutely underway. The operative part of this phrase is "way" since America has a "way-to-go" before the recovery actually takes hold.
The 1950s were a post WWII society in America that involved larger families and boomers who had, on average, 2.3 children. As those children were born and came of age, there was an unnaturally large housing cycle which, on a per capita basis, made for an unusual level of housing demand relative to the historic norms in America.
The 1970s were a time when 25 year olds with reasonably strong income were leaving their parents' home and acquiring houses of their own. This housing "super cycle" made for 800,000 units of peak demand for homes even while the US was in a rather "uninspiring" interest rate environment.
In fact, demand was so strong that only 18 percent interest rates in the 1980s could keep housing starts down, albeit momentarily.
The children of boomers graduated college or left their maternal home somewhere between 1987-1994 in which case these 2.3 children per household acquired housing and had children.
The difference here was that the children from these families were much fewer and further between, and typically were born with parents later in life for the same married couples.
What we then saw was a combination of "lag-boom" due to a combination of later birth times for the same married women and lower interest rates that made housing affordable, thus putting the cherry on top of an already demographically strong cycle.
Relative recovery
Today's new housing demand can be described as "recovery" but only relative to "extremely" recent financial-crisis history. What does this mean?
Simply put, there's a more rational, if not population-adjusted housing demand that we can factor in using the same multi-year generational data supplied to us by the St. Louis Federal Reserve.
The mean-average unit demand for housing is indicated at 450,000 units based on an average American population of 198 million. We can plainly see the "generation Y group" are, as a whole, having far fewer children. With immigration to America at historic records, we also see "imported demand" filling much of this "birth gap" which would otherwise change our projections.
Factor analysis of 0.00227273 percent yields an uninspiring mean average result for expected housing consumption. We may have a few years to see it, but the new average may lie in the neighborhood of 727,000 as a new demand-middle point.
Will the housing market continue recovering from these levels? The statistics suggest that while we are not likely to have a "super cycle" simply due to a demographic shift, the long run "new normal" demand should approximate 727,000 units annually from the 500,000 units we see today.
What about overproduction and consumption of housing?
We show production and related overconsumption of housing units of about 925,000 units annually while demand should have been running a more population per-capita normalized rate of between 650,000 and 700,000, which would lead us to forecast a real oversupply of around 275,000 units annually probably beginning in 1995 and moving toward 2005 for total overconsumption of 2.75 million units.
Demand cycles don't matter with that kind of slack in the system. Combine that with an especially poor unemployment picture and today's 425,000 annual run-rate of demand starts to look reasonable relative to recent history. We can effectively run at 425,000 unit demand for another 10 years and only then will the oversupply be worked through the system.
Simple math is best: 425,000 new construction demand combined with an annual "re-absorption rate" of 275,000, formerly "excess supply," brings us close to our targeted annual consumption rate of 700,000 units, based on normal population growth and simple demand based or normalized family dynamics.
We expect the home construction business to remain choppy, albeit on a slightly upward trajectory as old homes are demolished in favor of newer homes, but the current run-rate of 425,000 probably doesn't become a sustainable 650,000-700,000 number for several more years.
The author is Managing Director of Pacific Asset Management. The views are his own.
The American housing recovery is absolutely underway. The operative part of this phrase is "way" since America has a "way-to-go" before the recovery actually takes hold.
The 1950s were a post WWII society in America that involved larger families and boomers who had, on average, 2.3 children. As those children were born and came of age, there was an unnaturally large housing cycle which, on a per capita basis, made for an unusual level of housing demand relative to the historic norms in America.
The 1970s were a time when 25 year olds with reasonably strong income were leaving their parents' home and acquiring houses of their own. This housing "super cycle" made for 800,000 units of peak demand for homes even while the US was in a rather "uninspiring" interest rate environment.
In fact, demand was so strong that only 18 percent interest rates in the 1980s could keep housing starts down, albeit momentarily.
The children of boomers graduated college or left their maternal home somewhere between 1987-1994 in which case these 2.3 children per household acquired housing and had children.
The difference here was that the children from these families were much fewer and further between, and typically were born with parents later in life for the same married couples.
What we then saw was a combination of "lag-boom" due to a combination of later birth times for the same married women and lower interest rates that made housing affordable, thus putting the cherry on top of an already demographically strong cycle.
Relative recovery
Today's new housing demand can be described as "recovery" but only relative to "extremely" recent financial-crisis history. What does this mean?
Simply put, there's a more rational, if not population-adjusted housing demand that we can factor in using the same multi-year generational data supplied to us by the St. Louis Federal Reserve.
The mean-average unit demand for housing is indicated at 450,000 units based on an average American population of 198 million. We can plainly see the "generation Y group" are, as a whole, having far fewer children. With immigration to America at historic records, we also see "imported demand" filling much of this "birth gap" which would otherwise change our projections.
Factor analysis of 0.00227273 percent yields an uninspiring mean average result for expected housing consumption. We may have a few years to see it, but the new average may lie in the neighborhood of 727,000 as a new demand-middle point.
Will the housing market continue recovering from these levels? The statistics suggest that while we are not likely to have a "super cycle" simply due to a demographic shift, the long run "new normal" demand should approximate 727,000 units annually from the 500,000 units we see today.
What about overproduction and consumption of housing?
We show production and related overconsumption of housing units of about 925,000 units annually while demand should have been running a more population per-capita normalized rate of between 650,000 and 700,000, which would lead us to forecast a real oversupply of around 275,000 units annually probably beginning in 1995 and moving toward 2005 for total overconsumption of 2.75 million units.
Demand cycles don't matter with that kind of slack in the system. Combine that with an especially poor unemployment picture and today's 425,000 annual run-rate of demand starts to look reasonable relative to recent history. We can effectively run at 425,000 unit demand for another 10 years and only then will the oversupply be worked through the system.
Simple math is best: 425,000 new construction demand combined with an annual "re-absorption rate" of 275,000, formerly "excess supply," brings us close to our targeted annual consumption rate of 700,000 units, based on normal population growth and simple demand based or normalized family dynamics.
We expect the home construction business to remain choppy, albeit on a slightly upward trajectory as old homes are demolished in favor of newer homes, but the current run-rate of 425,000 probably doesn't become a sustainable 650,000-700,000 number for several more years.
The author is Managing Director of Pacific Asset Management. The views are his own.
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