Is it possible that America’s economy might surprise us with a sustained growth surge? The question came to mind as I recently slogged through a series of blog entries and reports on the web site of the Harvard Joint Center for Housing Studies . The Center’s researchers keep close tabs on U.S. housing markets and have a particular interest in the factors believed to influence the demand for housing.
The relevant background here is the collapse of U.S. housing markets at the tail end of the credit-fueled boom that preceded the 2007-09 financial crisis and Great Recession. Starts plummeted from two million a year over 2004-05 to less than 500,000 at the low point of the economic slump. This was accompanied by an unprecedented nation-wide decline in home prices that delivered a blow to the net worth of millions of middle class American families.
The good news is that U.S. housing starts and residential investment spending have slowly picked up since 2010, and home prices have rebounded in most parts of the country. This year should see U.S. housing starts hit one million, for the first time since 2007. Of interest, U.S. economists generally believe that underlying demographic trends – population growth, population aging, and rates of household formation – should translate into something closer to 1.4-1.5 million housing starts per year, a level that’s unlikely to be reached before 2016. In the meantime, U.S. home ownership rates have continued to fall, despite a generally improving American economy, with 2013 marking the ninth straight year of dwindling homeownership.
By any standard, the U.S. housing recovery has been a muted affair, as the large inventory of empty and re-possessed homes is slowly run off and many Americans struggle in an economy where decent-paying jobs remain hard to find for many. But at the heart of the sluggish growth of U.S. homebuilding is a pattern of exceptionally weak household formation. New households come into being for several reasons: young adults leave their parental home and/or graduate from school, people get married, couples divorce (at which point one household commonly divides into two), or new immigrants arrive in a community. Household formation has dropped sharply in the United States since 2006 – and it has shown few signs of revival even though the economy and the job market have gradually gained traction.
It’s important to put the recent evolution of U.S. homebuilding and household formation in context. America’s population of 316 million is expanding by approximately three million per year (albeit population growth has slowed). In addition, each year millions of young Americans aged 20 to 29 reach a point where they become likely to establish households of their own. This dynamic creates an ongoing, demographically-driven demand for new housing (whether through renting or via ownership); it also stimulates demand for other goods and services that are linked to household formation and housing market activity (e.g., new furniture and carpets; real estate, financial and legal services).
When economists predict that annual U.S. housing starts should average 1.4-1.5 million in the coming decade, they have in mind the need for additional housing based on population growth plus the demand that stems from young adults forming independent households. The Harvard housing experts forecast 1.2-1.35 million new U.S. households per year over the 2015 to 2025 period. But some analysts believe the Great Recession and the sub-par economic recovery that followed in its wake have left some 2.5 million “missing” U.S. households. These are households that would be been formed had economic and credit market conditions not been disrupted by the recession, the financial crash, and prolonged sub-par job creation.
Add it all up, and there’s a good chance the U.S. will experience a multi-year surge in the demand for housing (and the products and services related to it) as the economy improves, household formation accelerates, and some of the “missing households” re-appear. This could produce an upside surprise to U.S. economic growth over the next several years. Faster household formation and stronger growth in homebuilding would clearly benefit millions of Americans. But it would also be welcomed by the Canadian lumber and building materials industries – which remain heavily focused on the huge American market.