2011-06-02 Housing Starts Will Need to Rise Sharply

WEDNESDAY, MAY 18, 2011

The Long View on Housing

--There’s a Boom Out There Somewhere

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.

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. If this rate continues over the next 10 years, roughly 11 million units will be lost, implying that the same number of units will have to be added to the housing stock simply to prevent a decline. For the housing stock to expand by 12½ million units, then, 23½ million units must be added to the stock over the next 10 years!

Now, not all of these additions to the housing stock would result from new construction. In recent years, new construction has accounted for about 70% of all gross additions to the housing stock, with other sources, such as recoveries of condemned units, mobile homes, and conversions of nonresidential structures, accounting for the rest. Still, these proportions, if maintained over the next 10 years, suggest roughly 16 million housing starts over the next 10 years. That’s an average of 1.6 million starts per year!

---This is an excerpt from a commentary that was published on May 16, 2011.