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EYE ON HOUSING

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What Will Unlocked Pent-Up Housing Demand Look Like? NAHB has estimated that as a result of current economic conditions, there are approximately 2.1 million households that were expected to form in the last few years but did not. These “potential” households typically represent people doubling and tripling up on roommates and young adults living with parents. Unlocking this pent-up demand, a process that will be facilitated by an improving job market, will help reduce the excess inventory of homes. However, given ongoing challenges associated with obtaining mortgage credit and faulty appraisals, it is incorrect to assume that all of these potential households will become homeowners. Data from the American Housing Survey (AHS) can help estimate what form unlocked pent-up demand will take.

The chart above presents data from the 2005, 2007 and 2009 editions of the AHS. The data illustrate the number of households who reported that their primary reason for moving to a new housing unit was “to establish a new household” (*see data footnote below on difference between gross and net household formations).

As can be seen above, the numbers of such new households fell as the economy entered the Great Recession. Moreover, the share of these newly formed households that became owner-occupiers fell as well, from 38% in 2005 to less than 32% in 2009. The lesson that can be drawn from the AHS data is that as pent-up demand is unlocked, approximately 70% of these new households are likely to become renters. Nonetheless, as rental vacancy rates continue to fall, these new renting households will increase rental demand, push up rents and cause existing renters to become homeowners. It is important to note that this process could be slowed due to increasing requirements for downpayments and obtaining mortgage credit. The analysis here suggests that unlocking pent-up demand could, in the short-run, cause the homeownership rate to fall, as many of the new households added will be renters. While this effect should be temporary, it does add another dimension to the ongoing debate among economists and housing analysts regarding what the low point will be for the homeownership rate as the housing market recovery gains momentum.

* Data footnote – it is important to note that the numbers in this analysis represent gross household formations - not net. That is, the numbers do not account for households that were lost during each period. For example, the AHS data indicate that between 2007 and 2009 o1.114 million net households were added. This number is determined by subtracting households that were lost from the gross household formations total. The focus here is the tenure choice of the flow of new households will take, so the gross numbers are used.

Case-Shiller House Prices – A Tale of 20 Cities The S&P Case-Shiller Home Price Indexes were released today with data through January for the 10 and 20 city composites (and component cities). The national index, which is calculated quarterly, and the Charlotte, NC metropolitan area, due to delays in data reporting, were not included in the release. The composites were both down 0.8 percent from December, according to the non-seasonally adjusted data. Some of the decline is clearly seasonal, after strong mid-year gains, but the overall trend for these two indexes in 2009-2011 has been modestly negative.

Among the 20 component cities, results were mixed. While only 3 cities posted positive gains in January, most of the declines were embedded in strong seasonal patterns, and 12 cities remained above earlier troughs. Phoenix and Miami, among the most notorious bubble markets, were 2 of the 3 gainers along with Washington, DC, the most consistent performer since its early 2009 trough.

More broadly, house prices in Denver, Boston, Detroit, Cleveland and Dallas continued to oscillate in the narrow ranges they’ve occupied since 2009, while prices in Las Vegas and Tampa trended down unabated, although at slower paces since 2009. The most troubling patterns in today’s release are the declining prices in the California markets that threaten to reverse what appeared to be promising recoveries, and the possible re-acceleration of price declines in the Atlanta market.

For the full histories of the 20 markets included in the Case-Shiller composite, click here cs.

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  • Joanne Loftus
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