WHY HOUSING VALUES LIKELY WON'T CRASH
By: J SCOTT
The question that keeps coming up these days is, "Are we in for a housing crash as interest rates move up, recession fears worsen, and housing affordability remains low?"
While there are lots of things that move housing prices, supply and demand are by far the biggest. In general, when there are more buyers than sellers, prices remain strong. When there are more sellers than buyers, prices drop.
Not to say that we can't see the softening during times of high demand or a strengthening during times of high supply, but we're unlikely to see any major price movements (i.e., a crash) as long as demand stays at or above levels of supply.
And while we've heard anecdotal things like, "we have an under supply of housing of 5 million units" and stuff like that, those numbers are based more on consumer surveys and speculation. Sure, we may have 5 million people who say they want to buy a house right now, but that doesn't mean we have 5 million people who can or will.
So what are the true supply and demand numbers?
Let's start with the demand side. Each year in this country, we see new household formations of about 1.7 million households. In other words, we have about 1.7 people creating a new household unit either through kids moving out on their own, couples divorcing, or other situations that create new household units.
Given that the home ownership rate in this country is about 66%, that means that about two thirds of those 1.7 million new household formations can be expected to ultimately buy a home.
That's just under 1.2 million new households pet year that will factor into demand for single family housing.
The other 127 million US households will likely offset each other with their buying and selling, but the new households are representative of growth and new demand.
On the supply side, we have seen about 1.1 million new single family residential units come online each year over the past decade. There's probably another hundred thousand units that are taken out of service, condemned, knocked down, or otherwise removed from the housing pool, but let's ignore those for now.
At the most basic level, we have 1.1 million new housing units coming online per year and we have about 1.2 million new households likely looking to buy a home.
Unless we see a major change in either completed new construction (not housing starts) or the home ownership rate in this country, it's unlikely that we're going to see any major changes in supply and demand over the next year or two or three.
I'm not saying there aren't other factors that impact supply and demand, but my belief is that the bulk of them cancel each other out. Household formation and housing completion numbers are the most representative of short term supply and demand.
I don't have a crystal ball, but that's my prediction and that's the data I believe supports it.