The Wall Street Journal editorial page had a piece yesterday titled 'The Housing Crisis is Over'. In my view, this assessment is premature by many years.
The article's main flaws, based on my own research, are its emphasis on pricing as the key driver of housing demand, and its sole focus on the inventory of new homes, ignoring existing homes. The author puts his faith in a rebound based on the issue of affordability: house prices have come down enough that people can afford them again. Fair enough but he treats the inventory of homes with a nonchalance that ignores underlying demographic trends, writing:
Even if home sales pick up, how can home prices stop falling with so many houses vacant and unsold? The flip but true answer: because they always do.
Flip, yes. True, no. This time it will be different because of two demographic factors:
First, the supply of homes is made up not only of new home construction but also of existing homes coming back to market. And we are facing a wall of existing homes coming to market in the next 15 to 20 years. How so? Quite simple: older people will leave their homes as they age or pass away. Some of these homes will be demolished, but most will come back to the market.
Average life expectancy in the United States is 78 years but many people leave their houses before their final years, to live in smaller quarters, with relatives, or at nursing homes. If we set somewhat arbitrarily the average age of a person who leaves his/her home at 70 years, we can see that the number of people turning 70 every year in the US will skyrocket from fewer than 2.5 million today to 4.3 million in 2025. The adjoining chart shows that this trend was quite favorable to housing in the last 25 years with the number of 70-year olds stagnating in 1984-1994 then falling in 1995-2003.
Conclusion: the number of existing homes coming back to market will see a dramatic and steady rise for the next 17 years. There will be somewhere between 1.5 million to 2 million homes coming back to market every year, equivalent to over 2 years of new home supply. This trend may provide a big boost to home remodeling, but it will erase the need for new homes in many parts of the country.
Second, the vast majority of home buyers fall in the 30 to 60 years age bracket. Here again, the trend was favorable from 1975 to 2005 as the number of people in this bracket was rising steadily. But it will now flatline for the next 12 years, as shown in the chart below.
On the more positive side, there may be a resurgence in first-home buying because the average age of first-home buyers is 32 years and the number of 32 year-olds will be increasing again. But this will not be large enough to offset the other two factors.
So is the housing crisis over? Hardly. Some areas of the countries will rebound sooner due to the migration of retiring baby boomers, or due to foreign buying stimulated by the weak dollar. But the housing picture nationwide is likely to remain difficult for another decade and a half.