Five years after the housing sector imploded, economists finally see some support ahead for battered home prices—help that doesn’t depend on Washington. The secret boils down to boom-and-bust demographics.
After the U.S. construction industry overbuilt during the decade that ended in mid-2006, new housing starts fell to their lowest levels on record during the years that followed. Meanwhile, the American population kept growing at roughly its long-term average rate of 3 million people a year. Eventually, there have begun to be too few new homes for new families, says Denver-based economist Fritz Meyer, and demand for housing is now increasing far faster than supply.
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If 3 million Americans reach maturity each year, as Meyer estimates, they may need 1.5 million new houses and apartments to own or rent. However, when the construction sector pulled back in 2007, it eliminated millions of jobs and hundreds of thousands of development projects. That retreat has translated into an annual shortfall of 675,000 homes, or 3.3 million in total.
Demographic pressures aside, there hasn’t yet been much improvement in the highest-profile gauge of housing market health, the national Case-Shiller Home Price Index. But the combination of growing demand and the lowest rate of supply in decades is a pretty good sign for the future.
It took until 2011 for the population finally absorbed the overflow of homes built between 1998 and 2006. That leaves the housing market tighter now than it has been in ages. And, according to Meyer, we haven’t seen anything yet. The “echo boom” of 129 million Americans born between 1977 and 2009 is still coming into its own and will eventually need even more houses than its Baby Boom parents required.
“What’s startling is that this generation has already surpassed the Baby Boom in size,” Meyer says. “The most highly touted demographic event in all world history is ultimately going to be dwarfed.”
Those born at the midpoint of the more recent population boom—1993—just turned 18 this year. During the next few years, they’ll start their adult lives and look for a place to live—and to judge by what happened to the Baby Boom, that will result in enormous demand for housing. The midpoint of the Baby Boom generation turned 18 in 1981, and during the next five years, the number of housing starts nearly doubled to keep up with demand.
If history is any guide, it might take a few more years before the Case-Shiller index finally starts to budge off its lows and home prices recover some of the 30% they’ve shed since the 2006 peak. But gathering demographic forces, Fritz Meyer says, mean that sooner or later a new housing boom will follow the current bust.