Strong Housing Demand Points to Better Times Ahead, Harvard Says
Beyond the current cyclical downturn in the nation’s home building industry, strong underlying demand for housing should produce a healthy resurgence in residential construction, according to a report published last month by the Harvard University Joint Center for Housing Studies.
According to the projections of the analysts who worked on the study, sustainable demand for housing is conservatively measured at 19.5 million for 2005 through 2014 — or an annual average of 1.95 million.
By 2007, yearly average projections for the period decline somewhat because of the oversupply that occurred in the market as a result of the housing boom. Analysts at Harvard calculate that the period they scrutinized may well have begun with an oversupply of 500,000 to 750,000 units, to which another 250,000 excess units were added in 2005 and 2006 as the boom began winding down.
However, even assuming that the extent of the oversupply was as large as 1 million, the economists reported that their projections of sustainable housing demand for 2007 through 2014 would be reduced only to an annual average of 1.82 million housing completions, not counting manufactured homes.
The average annual projection of 1.82 million is close to the 1.848 million homes that were actually started in 2003 at the start of the housing boom and significantly exceeds the number of homes that were built on average during the 10 years preceding 2003.
“Housing has always been a cyclical business, and we know that it is only a matter of time until we have worked down our inventories of unsold homes and can begin setting our sights on meeting a rising demand for housing,” said NAHB President Brian Catalde. “The demographic outlook clearly points to the need for a vigorous resurgence in home building to meet the housing needs of this country.”
The Harvard analysts note that the 19.5 million projected long-run demand is on the conservative end of the range of estimates that were considered in their study.
Among the factors driving up the demand:
- Net household growth should total 14.6 million from 2005 to 2015, with headship rates by age remaining constant and net immigrants increasing by an average of 1.2 million per year. While the Census Bureau has projected a much lower annual pace of 840,000 over this period, the economists note that the agency’s projections have been consistently low dating back to the 1960s.
- Considering only changes in age distribution of the population, the period should see demand for 1.2 million additional second homes. The true demand could be much higher, according to Harvard.
- There will be about 3.3 million net housing units removed from the stock during the period, based only on the age of the nation’s housing and not considering factors such as unanticipated natural disasters or trends such as an increase in infill and replacement construction.
One-quarter of the way through the 10-year period of the study, the course of actual construction in response to the projected demand is still uncertain, the Harvard economists say.
“But do not mistake short-term reactions to the housing slowdown as a harbinger of things to come for the long term,” they say.
“On the strength of demographically-driven demand for housing, the market will bounce back from its currently suppressed levels,” the report says. “If past cycles are any guide, the market with turn around once most of the oversupply is worked off, remain below long-run sustainable demand for a time and then rise back up above it for a period of time.”
The Harvard study — "Projecting the Underlying Demand for New Housing Units: Inferences from the Past, Assumptions About the Future" — was written by Eric Belsky, Rachel Bogardus Drew and Daniel McCue.