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Pent Up Housing Demand

Demand for housing has been suppressed in the four-year period from 2007 to 2010.  A review of household formation shows an annual increase of 500,000 to 600,000 over these years.  A more normal gain would be 1 to 1.2 million each year.  (As a quick clarification on households, one household corresponds to one housing unit.  A single person living in an apartment is considered one household.  A family of five people living under one roof is also considered one household.)  Population growth has not slowed, rising consistently by around 3 million each year, but household formation has.

That is due to an increasing number of people deciding, or being forced by circumstance, to live with others.  Rather than one roommate, many now have two.  Some recent college graduates have returned home to live with their parents.  Painful foreclosures have also forced people to find temporary arrangements with friends and relatives.

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Living in tight spaces is not sustainable.  More people cannot be comfortably shoved into existing households.  Aside from the desire to be independent and to move away from temporary living situations, there is the issue of “familiarity breeding contempt,” as the saying goes.  It is just a matter of time before household formation returns to its historic normal growth of 1 to 1.2 million each year.  There could even be more-than-normal household formation for a few years from both normal population growth and from people leaving temporary arrangements.  A stronger economy and job prospects will help in restoring normal household formation.

This suppressed housing demand is like a coiled spring.  But when will it pop?    This year?  Next?

When it does pop there will be a rush of home buyers and renters into the market.   Inventory will fall, home prices will rise.  Rents will rise.  Home builders will need to quickly ramp up production and hire construction workers.  Home builders are expected to add only 770,000 new units this year, which is well below the one million new demand from household formation, but still up from the 500,000 range of the past three years.

This concept is the basis for Warren Buffet’s optimistic outlook for housing in  last week’s interview.

Lawrence Yun, Chief Economist

Lawrence Yun is Chief Economist and Senior Vice President of Research at NAR. He directs research activity for the association and regularly provides commentary on real estate market trends for its 1 million REALTOR® members.

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Comments
  1. Craig Bryan

    Your “coiled spring” analogy is weak and only an opinion of what could happen. Here is mine. There will not be a sudden “pop” or explosion of tenants and home buyers rushing into the market, but a slow whoosh, extending over several years, as mortgage companies slowly, ever so slowly, begin to actually approve loans and put those willing to buy into a home. I respect Warren Buffet, but let’s be reasonable.

  2. Diana

    I agree with Craig Bryan, above. I have thought this all along despite what the forcasts are; I would respectfully, like to know what information Warren Buffet is basing his forcast on. He may have said, somewhere, but I have as of yet, to hear it.

  3. Mr. Buffet is wishful thinking on the next election. SW FL is seeing sellers market in bank owned under 100K. Rental market is strong on lower end. Middle and high end property is slow. IMHO, mid and upper will not move until consumer confidence is restored and we begin a recovery. Plenty of cash out there. Have seen more new loan sales mid and upper last month. Not a trend yet. No spring, a gradual release. Too many foreclosures coming on in the lower end of the market which is absorbing the buying energy. No upward pressure on pricing.

  4. Kevin

    Has ab economist ever claimed that demand was “pent-up”, then repeated it for four straight years while never being right? The near-termed nature of PENT UP in itself makes this but one of many Yun lies that he won’t have to answer to..

    There’s very little demand for houses at these price levels. Govt has tried forcing rates to zero, outright bribing people to get into the market, colluded with banks to reduce supply, and now they’re going to use our taxpayer dollars to pay off the underwater loans, just out of fear that people will walk.

    There is no pent up demand, total opposite. A glut of REOs and shadow inventory has been looming, what you could call PENT UP supply. It’s real, tangible, quantifiable, and the market needs to have it if the fools in NAR ever want sales volumes to increase.

    Hear, NAr Economists? Everything your criminal enterprise has pushed those crooks in DC to enact has ultimately served against the interests of your precious cartel-bot realtors.