Are There Too Many Homes in America?

[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.