[Karl Smith]*
Back at Modeled Behavior I've dribbled out over the past
months my thesis that contrary to common perception, America is closer to a
housing shortage than a housing surplus. The prices of houses rose to extremely high levels during the 2000s.
However, total home building did not.
What was noticeable about that period was the fraction of
homes that were site-built single family homes, rather than duplexes, apartment
buildings or mobile homes. However, the total amount of homes built barely
reached records. In absolute terms not many more homes were being built in 2005
than in the early 1980s when the population was smaller and immigration less of a
force.
I still think the reasons for the switch to single family
building are not fully appreciated. I've argued that whatever its flaws might
have been, the subprime boom should be viewed as a technological innovation that
allowed millions of households to switch out of the market for mutli-family
homes and mobile homes and into the single family market. This drove both a switch in the type of
construction and pushed up the price of existing single family homes.
Yet, even more important for understanding the current state
of the economy is appreciating that while the increase in home building during
the boom was not historic, the collapse in homebuilding has been. For several years now the United States has
been building fewer homes than any single month in the 40 years proceeding.
Typically homebuilding moves up and down in violent swings
that contribute greatly to the periods we call booms and recessions. The
movements, particularly on the downswing, are sharp and tend to be
V-shaped. When homebuilding collapses, the Federal Reserve begins to cut interest rates.
Eventually interest rates get so low that potential home
buyers are drawn off the sidelines to take advantage of the abnormally low
rates. This spurs an increase in home building, and with it, construction jobs
and a new phase of economic growth.
This process is precisely what has failed to happen during
the current recession. Home building collapsed. The Fed lowered interest rates
to zero, but it still wasn't enough to spur people back into the market. Homebuilding remained depressed and with it
construction employment. The economy has moved slowly into a growth phase but
the boom that frequently follows a bust never materialized.
Nonetheless, underlying pressure is mounting. The population is still growing despite the
lack of new homes. Household formation has been slow, but this seems to be primarily
because younger workers are moving back in with their parents or taking on more
roommates than usual. All in all, it
looks like there might be 2 million fewer households than we would expect given
the adult population in the country.
Estimates of the number of vacant houses are hard to get a
handle on. The census bureau tracks that number. However, its month-by-month estimate
was well out of whack with the preliminary data coming in from the formal 10-year
Census. Still a credible guess is that
there might be in the range of 1.5 million "excess" vacant homes. That number
includes empty rentals as well as homes for sale. Even in the best of times
some homes are vacant, but there are roughly 1.5 million more than there were
in 1990, adjusted for population changes.
That 1.5 million number is less than our estimate of the
number of missing households. Somewhere
around 500,000 new homes are scheduled to be completed in 2011. However,
typically around 200,000 to 300,000 homes are demolished each year as they
become unlivable.
This suggests our total inventory of available homes is less
than our total number of "shadow households" and is not about to catch up
anytime soon.
No one can predict with accuracy if and when household
formation will break out of its rut and millions of new home buyers and renters
will flood on to the market. However, rental markets in some places are already
looking tight and I suspect that a strong uptick in construction soon. It might be too early to predict an outright boom, but the fundamentals
are building.
Just as with the housing crash. it can seem as if nothing is happening until it all happens at once.
*I'm part of the Modeled Behavior team and an assistant professor at UNC-CH.
This article available online at:
http://www.theatlantic.com/business/archive/2011/06/are-there-too-many-homes-in-america/240786/
