No light ahead yet

The subprime mortgage meltdown, drop in confidence, credit crunch, etc., are only part of the problem with housing. The various elements come together when supply is compared to demand. The indicators of that relationship include the supply of unsold new homes, the number of existing homes for sale, and the number of vacant homes for sale.

Quarterly data from the Census Bureau's Housing Vacancy Survey were released today, offering no encouragement to offset the dismal results for December new and existing home sales reported during the past week. The overall homeowner vacancy rate for the 4th quarter of 2007 was shown as 2.8 percent. That was up from 2.7 percent in the third quarter, and matched the record set in the first quarter of last year. The homeowner vacancy rate has been reported on a quarterly basis since 1956. Prior to 2006, it never exceeded 2.0 percent. That is perhaps the most graphic and disturbing measure of the extent of imbalance in the market.

The homeowner vacancy rate is defined as the number of vacant housing units for sale, divided by the sum of the vacant fior sale plus owner occupied plus sold but not yet occupied. The title is a bit of a misnomer, since many of the vacant units for sale were not previously owner-occupied and may be sold to investors rather than for owner-occupancy. Mobile homes and condos are included along with conventional single-family structures, and and the vacant-for-sale category includes both existing (previously-occupied) homes and completed new homes. Only about half of all new and existing homes being offered for sale are vacant, but they represent a greater burden than homes that are still occupied or that have not been completed.

About 15 percent of the 2.18 million vacant homes for sale were not previously occupied, according to the HVS data. That translates into a larger number than the 195 thousand completed unsold new homes reported in the new home sales report, because new condos and mobile homes are included, and because completed homes with cancelled contracts are, in theory, included in the HVS but not in the sales report. Of course, the two surveys--especially the HVS--are not sufficiently precise to justify any major inferences from the difference.

If we assume that a normal/equilibrium homeowner vacancy rate is, say, 1.7 percent (the average in 2004), then the excess number of vacant homes for sale is over 800 thousand. Even though current production is below long-term potential absorption, it would take a while to soak up that excess. Add in the possible effects of widespread foreclosures and the picture is even more dismal.

January 29, 2008 - Comments (1)

Generational Housing Bubble?

As if the current severe housing market correction were not enough, a new paper by Dowell Myers and SungHo Ryu posits that the short-term problems will be overshadowed by a "generational housing bubble" as baby boomers continue to age. This report has been given prominent attention in media such as the Wall Street Journal and the Economist.

Myers and Ryu make estimates of the rate at which people in different age brackets bought and sold homes during 1995-2000, and report that among the population up to age 65 there were more purchases than sales, but beyond that the "sell rate" exceeded the "buy rate."  Given the impending shift in the age distribution, they extrapolate from that to a glut in housing supply.  Although the article in the Journal of the American Planning Association is more nuanced than the press reports drawn from it, it is still misleading.  It indicates that a major shift is imminent and that it will occur because boomers will "retire, relocate, and eventually withdraw from the housing market."

Sales by homeowners age 60 and over in 2000 were estimated by comparing their numbers to the numbers of owners from the same cohorts in 1990, using the difference as "a measure of all the home sales that were not followed by purchasing another home, but by renting, moving to a retirement home, or death."  It is that last component that undoubtedly accounts for much of their estimate. In a key chart with the vertical axis representing persons in each age group buying and selling, the scale ranges from zero to six percent, and the "sell rate" soars off the chart for those aged 80 and over. The caption says that "8.8 percent of persons 80 and older sold homes each year."  In that context, "sold" is a euphemism. In fact, according to data from the National Center for Health Statistics, more than 11 percent of persons 80 and older died each year during that period.

As I found when I looked at this subject in 1996, most older homeowners don't move, and if they do they are unlikely to become renters, move in with their children, etc.  Indeed, they were more likely than younger movers to buy newly-built homes. In connection with a presentation I gave in April 2006, I noted reasons to expect that the leading edge of the baby boom would be even less likely to opt out of home ownership in the near term.

Extensive and thorough analysis of housing demand among the older population may be found in a series of articles about housing wealth written over the course of two decades by Steven Venti and David Wise.  The most recent paper that I have was written in 2001.  They found that "in the absence of a precipitating shock--death of a spouse or entry of a family member into a nursing home--families are unlikely to discontinue home ownership.  And even when there is a precipitating shock, discontinuing ownership is the exception rather than the rule."

There will be a negative effect on housing demand from the passing of the 1946-1964 baby boom, but it won't be soon or sudden.

January 27, 2008 - Comments (3)