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Macro ThesisContrary to popular conception, new housing demand has little to do with foreclosures, home prices,etc. New household formation drives new housing demand. The largest drivers of new householdformation are population growth, demographic trends, and general economic conditions, such asunemployment and consumer confidence. Circularly, the biggest drag upon current US economicconditions is the dearth of residential construction, thus the housing sector and economy are in a classicKeynesian feedback loop. Once the feedback loop is broken, whether through stimulus or old fashioned
animal spirits, the rebound in residential construction will be sharp as there is large “pent up” demand
for housing and new housing starts are at unsustainable lows.The MathThe basic math is that the US needs to build 1.3MM to 1.7MM homes a year, whether single family ormutli-tenant, to keep up with population growth, homes destroyed, and secondary home demand. Forthe last three years, including 2011 projections, housing starts have averaged ~550k/year,approximately .75MM to 1.15MM below trend. Including the below trend years of 2007 and 2008, theUS will have underbuilt housing by approximately 4MM units exiting 2011. From 2000 to 2006, the USoverbuilt homes by approximately 300k/year and 2.1MM in total. Including manufactured housesdelivered from 2000-2010 of 1.4MM, the total overbuild was approximately 3.5MM versus anunderbuild of 4MM.
In a “normalized”
housing environment, the US would actually be experiencing ashortage. Further, the 10 year housing start total from 2002 to 2011, which encompasses both thebubble and crash, will be the second lowest 10 year housing start total in any 10 year period since the1960s, when the population of the United States was 40% less. If there is a large oversupply, when wereall these excess homes built?Why then does the vacancy rate remain elevated? The trouble lies with the anemic pace of net newhousehold formation over the last three years. From 2008 to 2010, new household formation averaged~500k/year versus ~1.2MM/year from 2000-2007. The biggest drivers behind this shift are 1) thedecrease in young adults living alone/away from their parents
, 2) an increase in “doubling up” among
families, and 3) a sharp slowdown in immigration. Some of this is attributable to structural changes; forinstance, rising incomes in the emerging markets have kept many potential immigrants at home while atthe same time the US has clamped down on illegal immigration. However, I believe the main driverbehind low household formation is unemployment, thus the dearth in new household formation ismainly a cyclical issue. Young adults still prefer to live away from their parents or with fewerroommates, as shown in surveys and the significant increase in young adults living alone if they are fullyemployed. Households that previously lived separately but are currently
“doubling up” presumably
aspire to live alone again. Further, while the change in immigration could prove more structural, the
demographic shift from the “Baby Bust” generation to the “Echo Baby Boom” generat
ion, who will bethe largest generation of Americans to ever form households, should more than offset any slowdown inimmigration. (Note: For a more detailed explanation of the Echo Baby Boom, please see the JCHS 2011State of Housing report.)