Housing demand set to surge with next generation, study finds

A new study by National Association of Home Builders economists warns that housing demand will quicken as household formations catch up from recession-dampened levels.

The study calculates that 2.1 million household formations were delayed from 2007 to 2009 as a result of the harsh economic conditions, which would account for two-thirds of the 3 million excess housing units recently cited by, among others, William Dudley, president of the Federal Reserve Bank of New York.

Doubling up with roommates or living in their parents’ basements to withstand the weak economy, such potential households represent future occupants of rental or ownership housing as their financial situation improves.

These delayed households will materialize, coinciding with a re-acceleration of the rate of household formations that will be driven largely by the children of baby boomers who are moving into their young adult years and who constitute a generation even larger than their parents’.

While not directly addressed in the report, these findings suggest that the nation’s homebuilders should be gearing up now to meet the housing demand that will be increasing significantly as the U.S. economy moves forward, a task for which they are ill-prepared because they are unable to obtain financing to begin new projects.

“There should be a sense of urgency to restore the capacity of a fully functioning housing industry to meet the demand that is looming not that far out into the future,” said NAHB Chairman Bob Nielsen. “Instead, builders must contend with severely curtailed access to the credit required to even begin moving into the planning stages for housing that will be in strong demand by the time it is completed.”

As a result of scarce financing, new rental apartments, which traditionally provide young households with their first housing, “are not moving nearly fast enough into the pipeline today,” Nielsen added. “It can take a few years for some of these larger projects to be built, and already we are beginning to see apartment vacancies tightening up in many major markets.”

During the recession, the NAHB study finds, average annual household formations slumped to 421,000, roughly a third of the long-term average. Households were being formed at a fairly consistent average growth rate of 1.0% from 2000 through 2007 before they noticeably declined. The researchers extended the 2007 level by the 1.0 percent average growth rate, and from this baseline number subtracted the Census Bureau’s estimated households for 2010 to conclude that there were 2.1 million pent-up household formations.

“A considerable portion of the excess housing supply is due to a steep decline in demand related to economic conditions, rather than due purely to overbuilding,” the study says. “This has important implications for recovery in the housing market.”

The study concludes that today’s excess supply of housing “reflects or embodies significant pent-up demand, implying that recovery in the housing market will come more quickly as the economic recovery makes progress and pent-up demand turns into realized demand, absorbing vacant units in the existing stock and adding pressure for the construction of new units.”