Economist's Commentary: June 18, 2008
How Many New Homes Should Be Built?
By Lawrence Yun, Chief Economist
Housing starts have tumbled lately, with May's activity reaching the lowest point in over 15 years. Less than a million new housing units will be built in 2008 and possibly even fewer in 2009. A large part of the cutback is due to too much housing inventory in the aftermath of too much building during the boom years. However, today's building activity is far below the historic norm, and begs the question: for how long should we anticipate these comparable low figures before we will see an upturn?
It is a given in the U.S. that population will rise by roughly 3 million a year. Depending upon current immigration policy the figures can be slightly above or below that. The 3 million additional people would translate into about 1.2 to 1.4 million household formations per year (the number of housing units needed to house these additional people).
Though difficult to precisely measure, it is conservatively estimated that about 300,000 homes get demolished or become uninhabitable each year. Out of 120 million housing units in the U.S., the demolition rate is in essence a quarter of one percent - a very conservative estimate indeed since this assumption is based on the premise that a typical home will last for about 300 years before being demolished.
The number of new homes needed to be built to house new households and to replace demolished units, therefore, is 1.5 to 1.7 million per year. For simplicity's sake, let's go with a single average figure of 1.6 million per year.
So the current new construction activity of less than a million is far below that which would be required to meet the demand. However, during the boom, we went way overboard and produced too much. Consider the following table showing annual new home construction, including my projections for 2008 and 2009:
We overbuilt particularly from 2003 to 2005. By my estimate, we produced 1.2 million in excess just over those 3 years of the housing market boom. Now, we are building far less in order to compensate for overbuilding.
Note, however, after about one million housing starts in 2008 and 2009, we will have returned to historical norm with an average of 1.6 million new home additions per year. Therefore, housing starts will surely need to ramp up in 2010 or the country could encounter a housing shortage condition and possibly a faster-than-normal house price appreciation. The next big house price gains will not be due to easy credit conditions, but could arise due to housing shortage conditions.
This is one in a series of commentaries by the Research staff of the National Association of REALTORS®. Read more commentaries >
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