There Will Be Demand for Housinghttp://www.fool.com/investing/general/2012/03/09/there-will-be-demand-for-housing.aspx Morgan Housel
March 9, 2012
Investor Bill Ackman was on CNBC yesterday discussing investments and the economy. He seems particularly bullish on the latter. "I think there's a decent chance that we massively outperform expectations," he told host Andrew Ross Sorkin.
The rationale is simple. Between collapsing prices and record-low interest rates, housing is now more affordable than ever. Factor in rising rental rates, and demand for new homes should rise dramatically. "Once unemployment stabilizes -- which, I think we're heading in the right direction -- all of the sudden people feel comfortable buying a home," Ackman said. That builds momentum that can drive the entire economy higher.
But hold on, warned former senator and co-host Judd Gregg:
Ackman's reply was, to paraphrase: Yes, but the baby boomers had kids. And they like buying homes, too.
I'd like to expand on that a little.
The baby boom generation was indeed large compared with their parents' cohort. But given the number of kids they had, the U.S. now has a fairly young population:
Source: Census Bureau.
That's important when forecasting housing demand. Over the long run, housing demand rests on one key number: new household formation.
Since 1947, an average of 1.2 million new households have formed every year. New home construction has averaged slightly more -- 1.5 million a year -- for two reasons: Some old and dilapidated homes are torn down every year, and we had massive housing overbuild over during the 2000s.
The bad news: New household formation fell off a cliff when the recession hit. In 2009, just 398,000 new households were formed, the lowest in decades. High unemployment among the young pushed a wave of people to move back in with their parents, and financial strains among older workers caused families to double-up in a single home. According to the Census Bureau, the number of individuals and families doubling up jumped from 61.7 million in 2007 to 69.2 million in 2011, and the number of those age 25-34 living with their parents rose from 4.7 million before the recession to 5.9 million in 2011. That drop in household formation is partly why new home construction plunged (it's now at an all-time low), and why it's been so hard to soak up excess housing inventory left over by the bubble.
Here's how a recent Goldman Sachs research report put it: