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Housing in Next 10 Years to Outshine Previous Decade
 From now through 2015, housing starts are unlikely to exceed last year’s record 2.073 million single-family and multifamily units, according to the long-term forecast just published by economists at NAHB. However, starts won’t be too far from the record in at least a couple of those years, and on average will exceed those of the previous 10-year period.
The real value of residential construction will exceed previous decades by an even wider margin, the forecast says, partly because the size of new homes is expected to continue drifting upward, but even more because of the addition of amenities and equipment demanded by baby boomers trading up.
Production, including manufactured homes, will average about 2 million units per year over the decade, “but average production will be lower in the first half of that period as excess vacancies are absorbed and only a few of the people born in the 1980s establish households,” says NAHB.
The upward trend in housing foreseen for the next 10 years will be largely driven by demographic trends, the forecast says, and not by interest rates.
Mortgage rates appear to have already peaked in the current slowdown, and the Federal Reserve is unlikely to change today’s 5.25% federal funds rate for some time. The NAHB forecast assumes the Fed will begin easing eventually, but won’t return to the low rates that helped propel the housing boom, with the funds rate averaging in the 4% range for the final seven years of the forecast period. Fixed-rate mortgages, now around 6.5%, will gradually rise to about 7.0%, compared to the 5.8%-5.9% average of 2003-2005.
No More Free Lunch
“In recent years, financing costs fell to their lowest point in half a century,” the forecast says, “while returns from alternative investments fell and the actual and expected gains from home appreciation rose….To the extent that recent experience created expectations about future appreciation, the expected cost of owning a home was less than zero, since the rate of appreciation was greater than the rate of interest.”
In the years that lie ahead, the NAHB analysis says, “mortgage rates will be higher, while the unsustainable rate of appreciation in home prices will move lower. Homeownership will still attract most households, but it will no longer appear to be a free lunch.
With strong competition from the condo market, the single-family share of new units produced will slip from the record 77% of last year to about 70% during 2010 to 2015, according to the forecast, which will still be higher than the 67% average share of the 1990s and the 57% share of the 1980s.
Driven by overall growth and aging of the adult population, the number of households is forecast to grow by about 1.5 million annually from 2006 to 2015, more than at any time since the early 1970s, when the initial household formations of the baby boom and an increase in the divorce rate, caused a surge in new households.
The number of households grew by an average of 1.28 million from March 2002 to March 2006, according to the Current Population Survey (CPS). Based on population increases alone, that rate should have been closer to 1.4 million. However, there was an increase in the share of adult men living with their parents, and there were also more adults living with siblings or other relatives, the latter partly attributable to immigration.
Immigrants Help Pick Up the Slack
In the forecast, net immigration, responding to a more restrictive political climate, averages 1.18 million annually, less than the average net migration from April 2000 to July 2005 of 1.21 million in Census Bureau population estimates.
Among immigrants, purchasers of new homes during the next several years will generally depend more on the foreign-born population that is already here than on future immigrants. “Most immigrants don’t buy homes immediately upon arrival, and homeownership rates are much lower for non-citizens than for naturalized citizens,” the forecast says.
About one-third of the roughly 35 million foreign-born people in the U.S. are naturalized citizens.
The retirement of a large number of baby boomers will reduce the rate of growth in the labor force from about 1.4% in 2005 to about 0.6% in 2015, according to NAHB economists, helping to push the sustainable rate of growth in the gross domestic product from between 3.0% and 3.5% now to between 2.4% and 2.9% by 2015.
Most of the slowdown in labor force growth will occur after 2011, and it can be ameliorated by more immigration.
To Occupy or Not to Occupy
As of the second quarter of this year, there were an estimated 16.4 million housing units that were “vacant,” or not occupied as primary residences, representing 13% of the total housing stock, up from 12% from 1996 to 2005.
“There was no single factor increasing vacancies,” according to NAHB, “but an increase in purchases of residential real estate for speculative investment purposes contributed,” especially in hot markets in Florida, Arizona, Nevada and parts of California. “Some of the homes purchased by speculators were rented or offered for rent, but many were kept vacant and reported as held off the market or put up for sale.”
Data from reports submitted under the Home Mortgage Disclosure Act show the share of loans to purchase one- to four-unit properties that were not for owner occupancy increased from about 5% in the early 1990s to 8% in 2000 and 15% in 2004. “These shares include loans for second homes and loans for long-term rental investment, as well as loans for more speculative purchases.”
According to LoanPerformance, a subsidiary of First American Real Estate Solutions, second homes accounted for nearly half of non-occupancy loans in the most recent years, with a further jump in the investor and second home shares in 2005 and a modest decrease in the first half of this year.
“In the long term, investors cannot be expected to continue buying homes without rental income, based on hopes of quick gains,” says NAHB. “Indeed, a correction is already underway.”
To see a free preview of the NAHB long-term forecast at HousingEconomics.com, click here.
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