Housing Starts and Demographics
Submitted by
CalculatedRisk on Thu, 09/13/2007 - 2:48pm (39 comments)
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Hello CR,
just checking i
Bernanke, Paulson to testify on mortgages next week. Greenspan to take notes for future book deal.
Bernanke, Paulson to testify on mortgages next week - MarketWatch
So what is it going to be?
Free houses, lots of neighborhood brothels or cheap marijuana?
Why must you lie about housing demand!
Um, this really needs to be expanded to be more accurate. A couple of quibbles I have :
1) Population growth alone isnt going to get it done because you need to understand in which age groups the population is growing compared to how it used to be. If we were coming into a wave of fast population growth, and its all age 0-19, that wont help housing much.
2) You also need to think about how many of those people in those home buying age groups are actually already "owning" a home (I use that word liberally), which is a vastly different number now than it used to be, since we pushed forward tons of demand.
There isn't anything really wrong with the basic principles here, it's just that it is a bit simplified and is going to overstate housing demand definitely when it comes to ownership rates.
The issue of second home ownership is something that also needs to be accounted for. If a lot of second homes come back on the market, well, that will change the picture a bit for starts as the vacancy rate is pushed higher.
Geoff, how long to you want the post to be! I agree completely that we need to look at age groups too (this is a top level look at demographics).
People in their late teens will be moving out in the next few years. Plus there might be a lot more one person households in a few years as all the boomers divorce or lose their spouses. But I think this hits the high point - demographics are worse now than in the '70s.
Thanks for the feedback.
Best Wishes.
Just busting your chops CR. Like I said, it's not so much wrong, just if other people want to expand on this for their own purposes (perhaps Jas?)
then their are a host of things, like immigration and its effects, that need to be taken into account. But for broad principles, this will do fine.
their/there...oy. Perhaps a nap would help.
CR,
Isn't housing starts going to be driven by new home sales?
Housing starts plunged in 2006. Then, things leveled off a bit in the first half of 2007 temporarily. Why? Inventories were still bloated. If the answer is because builders had to build to clear land off the books, then the question is why didn't they do that in 2006? They certainly have the production capacity to build. It seems more plausible that starts temporarily leveled off in the first half of the year because demand leveled off as well.
You've often said builders are still building too much. Based on what? Excess inventories? Well, yeah, but then again building anything right now is building too much. So they're still going to be "building too much" at a rate of 1.1 million. Why is 1.1 million the level you think starts will decline to? You've estimated that at that level if will take about 2 years to clear inventory. Why is two years significant? It seems that the level of starts is going to be driven by the number of new home sales, but I haven't seen you discuss that much. I think at one point you were estimating new home sales would bottom out at 800K, but given recent events I assume you've downgraded that forecast.
Shouldn't we be estimating new home sales to determine how low starts are going to go? It seems kind of arbitrary to say that new home sales will fall to a rate of 1.1 million because that will clear inventory in two years.
Is the administration stil trying to sneak the illegal amnesty bill through or is it dead? You know they wanted to fill all those empty homes with illegals.
See if this link works
RealMoney.com: Six Factors Helping Housing's Recovery
What would housing demand be without the explosion in the immigrant population ? I heard on the news yesterday that the Census Bureau said that 1 in 5 households now does not speak english at home. To me this translates to 20% of households being recent immigrants. It seems that if rampant immigration had not been allowed, demand for housing would have decreased, while relative housing costs would have decreased.
There is a huge shadow population of illegals, probably largely unaccounted for but I wouldn't know how to tell. That leads me to believe there is some demand that isn't reflected and may support a bottom above the worst estimates. Just the same...
EXCELLENT WORK CR!
But the illegals live 12/ house.
Aren't you ignoring that by the time housing starts hit their projected 1.1 million low, oil prices will likely have reached $700/barrel due to crashing world oil production/net exports, necessitating an abandonment of far off exurbs and much suburban sprawl, and requiring current land owned by builders to be devoted to local farming by the future unemployed middle class?
HELLO?!
And they shall turn their Hummers into plowshares and commute no more!
Why must you lie about housing demand!
Jas Joking | 09.13.07 - 8:34 pm
Best comment ever.
Best comment ever.
Thank you! I'll be here all week.
Unabashedly off topic, but perhaps there is justice in this world.
"Throwing the book at O.J."
Throwing the Book at O.J. Simpson - washingtonpost.com
From "FHA Program Key in Surge of Foreclosures," Denver Post, 8/24/06: "One government source estimates 20,000 illegal immigrants hold FHA-insured loans in metro Denver alone. 'That's probably a pretty good guess,' said Jefferson County District Attorney Scott Storey."
Bet we could fill those houses up real quick if the nativists would allow us to open our borders to the masses of Africa and Asia
barely,
These past few years were the first time (and maybe the last) in which illegal immigrants could easily get home loans. Don't you think that market's probably tapped out for now?
Steve, I've tried to cover many of these issues before - see this post
.
Long ago I projected New Home sales would fall below 800K units per year. Now BofA is projecting a drop to 700K. Goldman a decline to 650K for a couple of quarters.
So maybe starts will fall a little further than 1.1 million. Maybe. I'm not trying to forecast the exact number - but I'm trying to get the direction and general magnitude correct. So far so good.
Best Wishes.
re: inOrlando
Lawyers he's hired simply cannot find Simpson's money -- though tax returns they obtained in 2002 and 2003 show he was making nearly $400,000 per year. His pro football and acting pensions are protected from seizure. He lives on a nice street in Miami, he takes his children on vacations to the Bahamas, in large part, Goldman's attorneys say, by a complicated scheme of refinancing loans on his home, using that money for living expenses, while having the payments back to the mortgage company protected by law.
Bloody MEW, now there's a new twist on a cash-out refi.
CR,
You are falling into the same trap as every other economist, because you're forecasting starts based on data such as supply, demand, prices and affordability.
But there's two other variables you are missing, both negative:
I estimate 70% of foreclosures displace a new start in the supply/demand chain. In other words, 10 foreclosures absorb the equivalent of 7 new starts. That's mainly because most people who lose homes to foreclosure aren't able to go back into the buyer pool for some time. You can't have the foreclosure activitity we are having and maintain 1.0 million starts, unless you assume that a lot of the REOs will just sit and rot. (Some will.)
Long after demand for new starts rebuilds, builders won't be able to supply them. The normal sources of financing won't be there at affordable rates. This will be especially true of the largest public builders, who have so much debt and such compelx capital structures (and lawsuits and downgrades).
Starts will fall to 800,000.
The New Republic
FDR Solves the Mortgage Crisis.
History Lesson
"Here should be an objective of Government itself, to provide at least as much assistance to the little fellow as it is now giving to the large banks and corporations."
-Franklin D. Roosevelt, April 7, 1932
The Page You Are Looking For May Have Moved | The New Republic
Dallas Business Journal
Texas gets 'F' on financial security report card & Bush is exporting it to the remainder of the nation
Texas gets 'F' on financial security report card - Dallas Business Journal:
CR: thanks for your thoughts on demographics and its effect on housing, my guess is that it is a theme you will be returning too many times.
FFDIC: "Here should be an objective of Government itself, to provide at least as much assistance to the little fellow as it is now giving to the large banks and corporations."
-Franklin D. Roosevelt, April 7, 1932
How about payday advances at the discount window? Is the Fed accepting Beanie Babies as collateral yet?
Thanks for the article. It detailed a number of parallels. It is easy to imagine reading a description of today in something like Kindleberger's Manias, Panics, and Crashes.
How about payday advances at the discount window? Is the Fed accepting Beanie Babies as collateral yet?
No but 'Benny Babies' would work...
Nice post, CR.
In my view, our economy began to change in the early '80s; that's when we saw personal consumption/GDP take off, and growth in household debt, too.
When I looked at housing in that light, that people/household was artificially low in recent years, and that density from '70 and '80 might be more the norm, I concluded that we had more than 10 years of excess housing stock on hand.
We'll see how this sorts out, but given the need for the indebted to pay back their loans, or for creditors to write such off, I think we are going to see a big time drop in consumption due to paying off debt (debtors) or negative wealth effect (creditors).
FFDIC - interesting post. The way they worked out involved pain for thhe borrowers, and pain for the lenders who took losses even when a mortgage was bailed out, I like it.
Why don't we have such a plan today? Because today's lenders have too much influence in politics. Today's solution will likely involve guaranteeing the full amount of some loans which is effectively a lender bailout that traps the homeowner. Or perhaps we will monetize the problem with inflation which will make the majority of Americans poorer while preserving as much wealth as possible for the reckless bond buyers.
The HOLC plan was brilliant.. this seems to be the brilliant piece:
In order for the HOLC to issue a loan, it needed to pay off the existing liens. This potentially posed a serious problem, as HOLC loans were never to exceed 80 percent of the appraised value of a property, which was often below the outstanding loan balance. The HOLC had to convince the existing lenders to accept those losses. The HOLC was able to succeed because it made lenders an offer they couldn't refuse: A government guarantee of four percent interest in the amount of the new loan, which was worth far more (even at a reduced valuation) than the zero percent they were effectively getting from delinquent loans. Add to that the cost of servicing, foreclosure, and disposition, the decision was a no-brainer.
"In my view, our economy began to change in the early '80s; that's when we saw personal consumption/GDP take off, and growth in household debt, too."
Laffer curve, free lunch, voodoo economics.............
Monetarist debt scam, perpetually rising asset "prices" mistaken for value.
There is no inflation as long as the money supply tracks "pricing".
Interesting post.
It would seem that not only is the recent boom unsustainable, but the sustainable rate before the boom may not be sustainable, either. Either way, there is a long, long, long way to go. Maybe we should attack the problem from the other side: bring the demo numbers way up - sort of the New Orleans approach.
In order for the HOLC to issue a loan, it needed to pay off the existing liens. This potentially posed a serious problem, as HOLC loans were never to exceed 80 percent of the appraised value of a property, which was often below the outstanding loan balance. The HOLC had to convince the existing lenders to accept those losses.
Can I default too and get the 20% off coupon and a 4% loan?
The HOLC did more of the banks than the homeowners.
In the 20's there weren't a lot of 2 income households. There also wasn't much in the way of "exploding" mortgages. People who went into default, usually did so because they had lost their job. If they couldn't find another one, it really didn't matter what the terms on their mortgage were.
The HOLC mostly got those loans (and losses) off the banks books at the last minute. There was no FDIC back then and runs on the banks were common. The HOLC provided a safety valve of sorts.
When the HOLC did work for homeowners, it was because they were able to reduce their payments. It mostly was able to reduce the loan burden by extending loans from 15 to 30 years.
I'm not really sure how a HOLC(II) would save todays homeowner with an option or exploding ARM. Unless your suggesting offering them a 100 year "generational" mortgage.
I got to think this housing thing is a game of musical chairs. A coworker here in my office in Utah told me his brother just sold his 1100 sq foot house( with basement) for 295,000 to a California couple for cash. His brother paid just 145,000 for it three years ago. Wow-50,000 a year in tax free income made! Anyway, his brother is now taking the proceeds from the sale and is paying cash on a house in Tennessee where he be starting a new job, albeit for less salary, but with no mortgage the brother will come out ahead. The younger workers in this office who missed the housing boom are applauding the brothers move--some of these guys can't touch a 300,000 mortgage even with a professional college degree job.
If you think demographics are bad now, wait until 2011, i.e. 1946 + 65 when the front end of the baby boomers hit retirement. How many of those folks bought a house in say 1979 for $30k, and even with the current down turn its now worth $500k. For many of those folks, that is a big part of the retirement plan, sell the big old house in the northern burbs and move to some smaller place down south. The will be selling en-mass
I love Paul Krugman and share his opinion on your blog. I wish I could find this type of information for my primary market areas. Your analysis makes a lot of sense and I wish that these builders would slack off on starts to get this excess inventory worked off.
Just a few thoughts.
1) I think that the demand for housing could have some upside as people continue to migrate from cities like detroit and buffalo to places like phoenix and vegas. The article in the nytimes about buffalo yesterday was scary.
2) We are going to start to see builders providing lower cost housing because the demand for higher cost housing will drop. Our company is looking at single-family homes in the low to mid 2s in southern california. I know of builders starting in the high 1s. This will provide housing supply for entree level buyers. The day of the McMansion will be over for a while.
3) Please explain how a foreclosure can add to supply? The displaced family has to live somewhere and that will likely be a rental unit.
4) I understand that many baby boomers are set to inherit trillions of dollars and wealth from their parents. Some of this will no doubt be put into second and third homes.
Just wondering about the "need" for demolitions.
Housing if maintained can last for hundereds of years. Except for floods, earthquakes, huricanes...exc.
So not sure the demolition rate is significant.
There is a possible inflection in population if immegration declines as well. We are near a tipping point. If we force out the mexican influx (by economics alone) then we will see even larger amount of low income vacancies.
A higher obsolescence (demolition) rate might drive construction demand but should have little effect on prices (and perhaps a slightly negative effect). Do you see why?