Friday, June 1, 2012

The concept of "shadow demand" in the housing market

Guest post by Greg Trotter

Here is Greg's response to one of the comments received on his previous post on US housing. Thanks for everyone's feedback.
Comment: - I still don't get your housing argument. As long as there is excess inventory, there won't be any demand for new construction. The people that are delinquent on mortgages will move into an apartment, but the home they vacate adds to the excess inventory, so it's a wash at best.
The entire point is that people that are delinquent on mortgages don't disappear into thin air. Everyone seems to believe that they do. Only so many are going to move in with mom.

Based upon current build rates and population growth (see original post), there are not enough (or soon won't be enough) new or empty homes/apartments out there for all of the people looking to move out of mom's basement. If employment continues to grow (and it is growing), we're going to need more houses.

I'm not talking about the price of housing either. I'm just talking about construction supporting growth. Banks will take losses on defaulted mortgages, but no one goes to debtor's prison or goes in front of the firing squad. These people look for alternative housing at a different price. They re-enter the demand pool.

What doesn't make sense about that?

New one family homes for sale (completed)

Vacant housing units for sale

This could certainly look prettier. We have 450k more vacant homes for sale as of 3/31/12 than there were in 1998-2003. However, those 450k units only act as substitutes for new construction if they are in the right place. Also, we are “under building” by 50k units per month compared to history (to account for population growth and destroyed housing stock). Also, new household formations have been very depressed since the beginning of the recession, to the tune of 2+MM below historical rates since the start of the recession.

The next link is from a horrendously biased source….It references NY Fed President Dudley, though. Also, the NAHB data is not quite consistent with census links below. The NAHB study shows a lower level of households than the census report (per my reading) for 2010. Maybe we can trust Dudley. Here's a quote....
"This exercise suggests that a considerable portion of the excess housing supply (NY Fed president William Dudley recently estimated 3 million units) is due to a steep decline in demand related to economic conditions, rather than due purely to overbuilding. This insight has important implications for recovery in the housing market. "

This next one looks bad. It’s the total vacant units available for sale or rent. Vacant housing units are a lot higher than in 1990, but the number of households is up 24MM (>25%) since then—even with the lower household formation (according to 2010 census—link below). If you think that the number of vacant units should stay constant as a % of households, they subtract 3 million from current in order to compare to 1990. That would make an adjusted 15.5 million vacant units for 2012 compared to 12 million in 1990. However, you need to consider the 2-3 million “missing” households that didn’t form during the recession. Also, I was using the 2010 census, which would ignore any household formations since then. If you grant me all of that, we could be on par with or “over vacant” by at most 1 million units compared to potential demand (I’m being generous). Okay, counting the “missing” households might be a stretch, but we have also created 1.8 million jobs in the last year and 3.3 million over the last two—not so good, but positive. If/As that continues, people move out of mom’s basement. Note: if employment falls, I will be wrong.

My last request would be to think about which vacant houses aren’t on anyone’s bid list because of location or condition. Anyway, there’s enough potential demand for the current housing stock to be “balanced” or even under-supplied depending on how you round your millions of units and adjust for household formation, employment growth, etc. If you don’t like my adjusting and rounding, remember that ~1.3 million households are typically formed in a year (make it a little lower b/c of demographics) and we’re only building ~700k housing units on an annual basis. People that say there is 4+ years of excess supply are wrong.

Vacant housing units for sale or rent in thousands
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