What Factors Are Fueling
Strong Housing Demand?
By CONSTANCE MITCHELL FORD
Staff Reporter of The Wall Street Journal
From The Wall Street Journal Online
It is no secret that home builders have been putting up houses at a furious pace. But even housing-industry executives -- typically an optimistic lot -- were taken aback when the government reported last week that home-building activity has accelerated.
The Commerce Department said that construction was started on new homes in February at an annualized rate of 2.2 million units. That was 15.8% higher than a year earlier and the fastest pace of residential construction starts in 21 years. Starts for single-family homes, the largest component of residential housing, reached an annual rate of 1.78 million units, a record. Even though many economists believe these numbers will ease in the months ahead as inventories of unsold homes start to pick up, it still is likely that 2005 could be the biggest year for home construction in decades.
And the activity isn't isolated to the affluent suburbs or the trendy sections of cities. Even the Bronx, the poorest of New York City's five boroughs, is seeing record levels of housing construction. According to Wilhelm Ronda, director of planning and development in the Bronx Borough President's Office, the value of residential developments under construction rose to $575 million last year from $174 million in 2001.
All this building raises a natural question: Why does the U.S. need so much new housing?
The simple answer, of course, is rising demand. But what is behind the demand is worth considering. First and foremost, the demand for housing reflects two key demographic trends -- new household formations and immigration. Economists at Harvard University's Joint Center for Housing Studies believe that household formations in the current decade will outpace formations during the 1990s, when they estimate that 12.5 million households were formed. Growth has been due in part to many Gen Xers establishing households at younger ages than even their baby-boomer parents did. Over the next 10 years, the Joint Center estimates that between 13.4 million and 14.5 million new households will be formed, depending on the level of immigration.
The U.S. Census Bureau estimates that immigration is running at about 850,000 a year, but the Joint Center says the actual number is between 1.2 million and 1.3 million. If immigration comes in on the high side, household formations will begin to approach levels last seen "when the baby boomers stormed into adulthood in the 1970s," says Eric Belsky, the center's executive director.
Rising wealth is a second factor behind strong housing demand. As baby boomers come into their peak wealth years, a good percentage are buying second homes. According to a recent report by the National Association of Realtors, 2.82 million second homes were sold in 2004, up sharply from the previous year. Exactly how many of those homes were newly constructed is hard to know, although estimates range from 5% to 15%.
There's another, less-discussed factor fueling demand for new construction: The rapid replacement of unusable and undesirable homes. According to housing-industry economists, the U.S. housing stock is in the process of being rebuilt, as aging stock is torn down to make room for newer stock.
The average age of an American home is about 33 years -- older than any previous time in U.S. history. The number of homes older than 50 years rose to 25.8 million in 2000 from about 18.8 million in 1990. The average age of the U.S. housing stock swayed between 23 and 27 years from 1940 to 1990, then started a persistent rise. As the housing stock ages, new construction starts "will be permanently elevated because we need to replace housing stock which is wearing out," says Fannie Mae economist David Berson.
Not that the oldest homes in the U.S. are disappearing the fastest. In some parts of the country, 100-year-old houses remain highly desirable owing to their size, architecture and solid construction. Older homes of shoddy or inferior construction are the prime targets of demolition. Homes also are removed or lost because of disasters such as hurricanes or fires, the conversion of structures between residential and nonresidential use and because of "tear downs," where home buyers tear down a perfectly fine, but smaller, home in an older neighborhood and build a larger house on the same lot. "The key is location," says National Association of Home Builders economist David Seiders. "Older neighborhoods are being systematically upgraded."
Getting a fix on how many homes are being removed from the housing stock is tricky. One study cited in a report by the NAHB found that net removals of housing between 1985 and 1995 totaled 7.4 million, or about 740,000 a year. The Census Bureau estimates are substantially smaller and they are forecasting net removals will total about 450,000 annually between now and 2013.
|
