Expectations of a robust housing recovery are not well
supported by US demographics.
From Bloomberg News (February 8, 2012):
Chief Executive Officer Jamie Dimon told investors and
analysts in a January conference call that housing is "getting
closer" to a bottom. "We're going to add 3 million Americans
every year for the next 10 years. That's 30 million Americans who
need 13 million dwellings," he said.
Mr. Dimon's estimate looks too optimistic on two accounts.
First, the US population will more likely grow by 23 to 26 million
in the next 10 years. And second, the demographic bracket which
includes over 80% of home buyers will grow at a much lower
The US population grew by 2.8 million people in the sixteen
months from April 2010 to July 2011, but over 700,000 of these 2.8
million were new immigrants. In the remainder of this decade, the
population will grow by an average of 2.6 million people a year,
assuming a more typical 1 million new immigrants per year. My
estimates are derived from data compiled by the Center for Disease
Control (which tracks life expectancy among other things) and by
the US Census. In the next decade 2020-29, the population will grow
by an average 2.3 million per year and in the following decade by
0.9 million per year, again assuming 1 million new immigrants per
year. Note that without immigration, the population would shrink in
2030-39 and in 2040-49, as I argued in
America Heading Towards Zero Population Growth?
It is not enough to tabulate the number of new Americans
(newborns or immigrants) to estimate the likely impact on housing.
We have to also look at the likelihood that they are in an age
segment and in an economic bracket that will lead them to spend a
fair amount of money on a home, regardless of whether they are
renting or buying. An ideal scenario would be a large increase in
the population segment of young and middle-aged Americans who can
be characterized as middle-class or richer. But this scenario is
unlikely in the next decade.
Of the 2.6 million annual addition to the population in the
present decade, 4.2 million will be from new births and 1 million
from new immigrants. And because there will be 2.6 million deaths,
the sum total of these three figures comes to a 2.6 million (4.2 +
1 - 2.6 = 2.6) addition.
The US Census recently disclosed
that foreign-born households are made up on average of 3.4 people,
more than the 2.5 people average for native-born households.
Assuming new immigrants are in similarly-sized households, one
million immigrants would absorb about 294,000 dwellings per year.
Incidentally, there were only 700,000 immigrants in 2011,
equivalent to a demand for 206,000 units.
Outside of immigration, the annual growth in population in the
present decade will be 1.6 million. Babies don't buy homes but
growing families with new babies may do so because they need more
space. In this case however, they are vacating one home and moving
into another, resulting in a net demand of zero in terms of units
(say trading a 3 bedroom for a 4 bedroom home) and a subdued net
positive demand in dollar terms (say trading a $250,000 home for a
$300,000 home). At the other end of the age spectrum, older people
who pass away often leave a home vacant, adding to the supply of
existing homes for sale. The demand for upgrades is debatable but
the supply from deaths is certain, resulting in a murky overall
A better way to look at the demand is to estimate the size of
the population of people who are likely home buyers. 75% to 80% of
home buyers are in the 30 to 60 age bracket. The remaining 20% to
25% of home buyers are aged less than 30 or more than 60 and are
generally buyers of smaller homes. In terms of dollar value, the
30-60 bracket could therefore represent as much as 90%+ of the
residential real estate market. This bracket now has about 125
million people but it has stopped growing (excluding new
immigration) in 2005 and will not resume its growth until after
2020. If the overall pool of likely home buyers is not growing,
then people are just trading homes amongst themselves without any
significant net gain in overall demand for new homes. Upsizing by
growing families could be largely matched by downsizing from older
couples whose children have left home.
Therefore if you assume no demand from existing residents and
demand of 294,000 homes from new immigrants, the total net demand
in the next ten years would be around 3 million units, far fewer
than the 13 million estimated by Mr. Dimon. Total home construction
will probably exceed this 3 million figure because of some
demolition of older homes and because supply and demand are often
not in the same location. Florida or Texas may see net demand while
some other regions see net supply.
Some attention has been given to other measures of demand such
as housing affordability and the rate of household formation. The
National Association of Realtors
said in March that the housing affordability index rose above 200
for the first time since recordkeeping began in 1970. An elevated
index is an indication of high affordability. But in any
transaction, there is the ability to buy and the need or desire to
buy. The affordability index shows that the ability to buy is
strong but it is not indicative of the need to buy. If people are
already in homes and there are few incremental buyers, housing
affordability is not an indication that demand will soon return. If
the index is high
demand is muted and interest rates are low, it does not follow that
greater demand will inevitably return. That would only be true in
the context of favorable demographics such as we have had in
As to household formation, it is still low but seems to have
bounced in the first quarter. It declined after 2007 because of a
fall in the divorce rate and because more young people stayed under
their parents' roofs. The youth unemployment rate has recently been
improving, raising expectations that household formation will also
recover. But even during the good times, the young demographic
contributes a relatively small demand in terms of units and an even
smaller demand in terms of value (since they tend to live in
smaller and less expensive housing). Furthermore, counting the
young people who enter the house-buying age bracket and neglecting
to count the older people who simultaneously leave this bracket
only presents half of a full picture.
Outside new immigration, there will be little demand for housing
from demographics until the end of this decade. When the 30-60 age
bracket starts growing again in the 2020s, housing demand will grow
again but it will be weaker than in 1985-2005 and will have to
contend with the new supply of homes vacated by rising numbers of
dying or downsizing baby boomers.
As to the exchange-listed home builders, two factors may work in
their favor despite the poor demographic backdrop. One is that real
estate is famously local, which means that, with sufficient
research, they may be able to focus on areas of the country which
are growing even in a time when the overall market is not. For
example, some parts of Florida or Texas may see more demand than
supply while some regions in the Midwest or Northeast see more
supply than demand. The second factor is the trend towards
urbanization with more people choosing to live in cities instead of
suburbs. In this vein, several home builders are shifting some of
their focus to multi-family developments.
The main risk to these forecasts arises from the difficulty in
assessing the impact of illegal immigration. It clearly contributes
to some incremental demand, perhaps not in the early years after a
person's arrival, but certainly after a few years. But here again,
the data is mixed because, as noted by the
Pew Research Center
, the inflow from Mexico has recently reversed for the first
I am short [[LEN]], [[PHM]].
The 40 Day Flood Of Facebook Research