If you are interested in a broader view of this issue, Brookings published a paper in 2004 that projects construction needs in all sectors (residential, commercial, industrial) to 2030 based on demographic projections. Demolition is accounted for in the analysis. If I recall correctly, there are projections for top metro areas, states and the U.S. as a whole. Here is the link:
JLA, thanks for that paper. I'm just trying to figure out the next couple of years!
I see they estimate that the ratio of people to homes will be stable for the next 25 years. This is important in understanding why there was such a surge in development in the '70s - and why demographics aren't as favorable today.
Thanks again. I'll spend some time looking at their study.
I don't recall what his reasons where for assuming no change in household size. Perhaps he defaulted to the current size in the absence of strong demographic evidence of a trend in either direction over the next 30 years.
Add in 100k per year for second homes and you're at 1.5M, exactly what Kohn refered to when he said we were closer to the trough than the peak, which you idiotically derided.
Ben, calm down. You might want to reread Kohn's statement: "starts may be closer to their trough than to their peak" Some simple subtraction suggests that Kohn believes starts won't fall below 1.2 million - not 1.5 million.
Let me help:
First, 2nd homes are already included in this simple analysis.
Second, this number is before the reduction due to recent overbuilding. Whether starts fall to 1.2 million (or below) is going to depend heavily on how many excess homes were built, and how quickly that excess inventory is worked off.
Third, I didn't deride Kohn. I wrote: "I think Kohn might be optimistic" when referring to his estimate of how far starts might fall. I think Kohn did an excellent job of presenting his views.
Earlier in the post I corrected an error Kohn made, but I didn't "deride" him (he was wrong about last year being the strongest since WWII - just a mistake - we all make mistakes).
Finally, this is a discussion of how far starts will fall. This is how it's done - people put how their estimates with their reasons - and then others suggest why it might or might not be correct. Nobody has a crystal ball, but hopefully this helps everyone understand the market dynamics (including me).
SAM, this is just the number of housing units - not the number of New Homes - so this includes apartments. The next step, something I'm working towards, is to estimate how far New Home sales will fall.
Estimating the number of homes "needed" this way seems flawed to me. For a given supply and demand there is an equilibrium price. The demand for housing seems like it must be inelastic in the long term but elastic in the short term. Short term might be many years.
Some number of people will rent or cohabitate for a while.
Reasons for the crash are rising interest rates, falling real income and decreasing equity to use for trade-ups.
When the counter argument is basic need of shelter, the product mix might need to change. The trade-up pipeline is at least somewhat clogged after three record years, so more low end units at low end prices should be added.
Do any of these reports track sales volume vs price quartile over business cycles? I think it might look like a race between snakes swallowing bolwing balls.
We've been trying to track this in Silicon Valley via new permits issued. this
Since the Sep'02 "bottom" Santa Clara County issued 25,470 new housing permits. In a universe of ~420Ku total, that's only ~6%. However, 25Ku is a 20(!)-month supply at the latest sales rate.
Keeping in mind we are also ~-80Ku jobs since Sep'02 & that's two strikes on the housing argument here at the center of "housing never goes down universe."
Name, this is part of a series of posts ... and I noted in the first one your caveat about price related to supply and demand. I suppose I should repeat that frequently.
Number of housing units to number of households isn't very sensitive to price. SIZE of housing unit can be sensitive to price, but number isn't. There are some second homes that are price elastic, and a little bit of doubling it, but the number elasticity is small. Household formation has some, but not a lot, of price sensitivity. There's a paper that's maybe 15 years old by Haurin, Hendershott, and Kamara that looks at prices, business cycles, and household formation, and I'd suspect that someone's done something more recent, but I don't know who.
mort_fin, thanks again. I'm amazed at how you remember all these papers. Keep them coming.
If the price was low for beachfront 2nd homes in Hawaii (say $100K for a 2000 sq ft house), I suspect demand would skyrocket! But mostly it makes sense that the number of people per housing unit would stay relatively stable going forward - just like it made sense that it fell rapidly in the '70s.
Another simple way to do it is to look at change in housung starts peak to trough for previous housing busts. it is about 50%. so we shold end up withh 1 to 1.2 bttom in starts.
remember members of the fomc arent selected bases on their forecasting abilities.
The market for second homes is definitely going to take a beating over the next few years. What skewed the thinking over the last few years was that real estate was steadily, if not quickly, appreciating asset. People who otherwise wouldn't otherwise be in the market for a second home were buying their retire home early simply because they were sure it would be an appreciating asset. It also made the case for buying a vacation home, or a condo at the shore, much more appealing, since you were acquiring an asset that would appreciate so quickly, it would cover all or most of the costs of ownership.
Now, second home markets are seeing some of the fastest falls. A major Wall St firm as predicted that home vales will fall next year. Now the second home buyer owns two depreciating assets, plus all the ownership costs of two houses...whoops... and if that second home was a condo in Florida, double whoops...
The new thinking will be, don't even think of buying the retirement home until you're certain you've sold your old home. And who will want to buy a condo at the beach, when there are thousands of empty ones begging for renters?
I would expect changes in the second home market to contribute to a market decline.
"I don't recall what his reasons where for assuming no change in household size"
I don't either, but I think household size in the US has gotten about as small as it can get - I don't think that the divorce rate is going to increase, or the marriage rate is going to fall. If the birth rate declines, so will household size, but that will slow population growth too so the net growth in households will not be affected.
It also made the case for buying a vacation home, or a condo at the shore, much more appealing, since you were acquiring an asset that would appreciate so quickly, it would cover all or most of the costs of ownership.
That could be a good thing for the rest of us, Bob - I remember renting condos in Vail about a block from the lifts in the late 70s for way less than what a nice hotel room cost. Aspen was a little tighter but still not too bad - cheap enough college students could rent really nice places. Though why anyone would rent to us barbarians I can't answer except to suggest 'desperation'.
There was a glut of them then & I had friends calling me when their parents who owned them had open weeks without renters and would deal - seemed like every week was an 'open week'.
My beer & lift ticket bill was higher than the cost to rent a very nice condo during that time period. I remember one year we got a three bedroom w/jacuzzi & wet bar (we had to bring our own booze though) for about what a hotel room cost on a per night basis - very swank. Sweet Jesus did we party on that trip.
If you got cash in hand this could signal 'good times' are here again.
CR,
I think this line of analysis is spot on, and I will be very curious how it turns out.
If you are interested in a broader view of this issue, Brookings published a paper in 2004 that projects construction needs in all sectors (residential, commercial, industrial) to 2030 based on demographic projections. Demolition is accounted for in the analysis. If I recall correctly, there are projections for top metro areas, states and the U.S. as a whole. Here is the link:
http://www.brook.edu/metro/pubs/20041213_RebuildAmerica.pdf#search=%22rebuilding%20america%202000-2030%20brookings%20institution%22
JLA, thanks for that paper. I'm just trying to figure out the next couple of years!
I see they estimate that the ratio of people to homes will be stable for the next 25 years. This is important in understanding why there was such a surge in development in the '70s - and why demographics aren't as favorable today.
Thanks again. I'll spend some time looking at their study.
Best Wishes.
You're very welcome!
I don't recall what his reasons where for assuming no change in household size. Perhaps he defaulted to the current size in the absence of strong demographic evidence of a trend in either direction over the next 30 years.
Add in 100k per year for second homes and you're at 1.5M, exactly what Kohn refered to when he said we were closer to the trough than the peak, which you idiotically derided.
Nice work, sport.
Ben, calm down. You might want to reread Kohn's statement: "starts may be closer to their trough than to their peak" Some simple subtraction suggests that Kohn believes starts won't fall below 1.2 million - not 1.5 million.
Let me help:
First, 2nd homes are already included in this simple analysis.
Second, this number is before the reduction due to recent overbuilding. Whether starts fall to 1.2 million (or below) is going to depend heavily on how many excess homes were built, and how quickly that excess inventory is worked off.
Third, I didn't deride Kohn. I wrote: "I think Kohn might be optimistic" when referring to his estimate of how far starts might fall. I think Kohn did an excellent job of presenting his views.
Earlier in the post I corrected an error Kohn made, but I didn't "deride" him (he was wrong about last year being the strongest since WWII - just a mistake - we all make mistakes).
Finally, this is a discussion of how far starts will fall. This is how it's done - people put how their estimates with their reasons - and then others suggest why it might or might not be correct. Nobody has a crystal ball, but hopefully this helps everyone understand the market dynamics (including me).
JLA, I'll try to read the study again this weekend. I really appreciate it when people point me in the direction of relevant research!
The persistence issue with housing is huge - how many homes will be demolished over the next 25 years makes a big difference.
Thanks again!
CR, not everyhousehold is a homwowner.Afterall, ownership has been in the 65-70% range..does that figure in your number?
SAM, this is just the number of housing units - not the number of New Homes - so this includes apartments. The next step, something I'm working towards, is to estimate how far New Home sales will fall.
Best Wishes.
Estimating the number of homes "needed" this way seems flawed to me. For a given supply and demand there is an equilibrium price. The demand for housing seems like it must be inelastic in the long term but elastic in the short term. Short term might be many years.
Some number of people will rent or cohabitate for a while.
Reasons for the crash are rising interest rates, falling real income and decreasing equity to use for trade-ups.
When the counter argument is basic need of shelter, the product mix might need to change. The trade-up pipeline is at least somewhat clogged after three record years, so more low end units at low end prices should be added.
Do any of these reports track sales volume vs price quartile over business cycles? I think it might look like a race between snakes swallowing bolwing balls.
We've been trying to track this in Silicon Valley via new permits issued.
this
Since the Sep'02 "bottom" Santa Clara County issued 25,470 new housing permits. In a universe of ~420Ku total, that's only ~6%. However, 25Ku is a 20(!)-month supply at the latest sales rate.
Keeping in mind we are also ~-80Ku jobs since Sep'02 & that's two strikes on the housing argument here at the center of "housing never goes down universe."
http://www.viewfromsiliconvalley.com
Name, this is part of a series of posts ... and I noted in the first one your caveat about price related to supply and demand. I suppose I should repeat that frequently.
Best Wishes.
Number of housing units to number of households isn't very sensitive to price. SIZE of housing unit can be sensitive to price, but number isn't. There are some second homes that are price elastic, and a little bit of doubling it, but the number elasticity is small. Household formation has some, but not a lot, of price sensitivity. There's a paper that's maybe 15 years old by Haurin, Hendershott, and Kamara that looks at prices, business cycles, and household formation, and I'd suspect that someone's done something more recent, but I don't know who.
Name, I added the original caveats as an update to this post.
I do think the mix will change - I expect the percentage of new apartment units to increase.
Best to all.
mort_fin, thanks again. I'm amazed at how you remember all these papers. Keep them coming.
If the price was low for beachfront 2nd homes in Hawaii (say $100K for a 2000 sq ft house), I suspect demand would skyrocket! But mostly it makes sense that the number of people per housing unit would stay relatively stable going forward - just like it made sense that it fell rapidly in the '70s.
Thanks again.
Another simple way to do it is to look at change in housung starts peak to trough for previous housing busts. it is about 50%. so we shold end up withh 1 to 1.2 bttom in starts.
remember members of the fomc arent selected bases on their forecasting abilities.
The market for second homes is definitely going to take a beating over the next few years. What skewed the thinking over the last few years was that real estate was steadily, if not quickly, appreciating asset. People who otherwise wouldn't otherwise be in the market for a second home were buying their retire home early simply because they were sure it would be an appreciating asset. It also made the case for buying a vacation home, or a condo at the shore, much more appealing, since you were acquiring an asset that would appreciate so quickly, it would cover all or most of the costs of ownership.
Now, second home markets are seeing some of the fastest falls. A major Wall St firm as predicted that home vales will fall next year. Now the second home buyer owns two depreciating assets, plus all the ownership costs of two houses...whoops... and if that second home was a condo in Florida, double whoops...
The new thinking will be, don't even think of buying the retirement home until you're certain you've sold your old home. And who will want to buy a condo at the beach, when there are thousands of empty ones begging for renters?
I would expect changes in the second home market to contribute to a market decline.
"I don't recall what his reasons where for assuming no change in household size"
I don't either, but I think household size in the US has gotten about as small as it can get - I don't think that the divorce rate is going to increase, or the marriage rate is going to fall. If the birth rate declines, so will household size, but that will slow population growth too so the net growth in households will not be affected.
It also made the case for buying a vacation home, or a condo at the shore, much more appealing, since you were acquiring an asset that would appreciate so quickly, it would cover all or most of the costs of ownership.
That could be a good thing for the rest of us, Bob - I remember renting condos in Vail about a block from the lifts in the late 70s for way less than what a nice hotel room cost. Aspen was a little tighter but still not too bad - cheap enough college students could rent really nice places. Though why anyone would rent to us barbarians I can't answer except to suggest 'desperation'.
There was a glut of them then & I had friends calling me when their parents who owned them had open weeks without renters and would deal - seemed like every week was an 'open week'.
My beer & lift ticket bill was higher than the cost to rent a very nice condo during that time period. I remember one year we got a three bedroom w/jacuzzi & wet bar (we had to bring our own booze though) for about what a hotel room cost on a per night basis - very swank. Sweet Jesus did we party on that trip.
If you got cash in hand this could signal 'good times' are here again.