Get Blog Updates on your iGoogle homepage:
| Declining Ownership Equates to Declining Demand |
| Written by Jonathan Smoke | |
| 08.09.2007 | |
|
Discuss this article on the forums. (0 posts) Yesterday I highlighted the troubling specter of declining ownership rates. When ownership rates go up, they doubly benefit the market for new homes. When they go down, the opposite is true. New home demand can be estimated using an assumption that existing households are adequately served by existing housing stock, ceteris paribus. So, ignoring demographic shifts and aging housing stock impacts, we could estimate that the new households requiring new housing would be equivalent to the number of new households who want to or can be owners. Therefore, new home demand can be estimated by taking the change in households and multiplying it by the ownership rate. Even if some of those households purchased an existing home, the seller of the existing home would require a replacement home, so in total we would see close to that estimate of new homes being sold. Of course estimating demand is far more complicated, as to do it well you need to account for localized trends and demographic factors. This is one reason why ownership rate changes don’t explain all of the movement in new home sales, especially on an aggregated national basis. For example, if ownership is declining because of affordability, there will likely be migration to less expensive areas where there isn’t enough housing stock.  But even in the simple example of focusing on national growth in households multiplied by the ownership rate, you can easily understand that if suddenly existing housing was oversupplied because fewer households could afford “for sale housing” or lacked adequate credit to finance their purchase, the new household demand may be met by already existing housing. Here are the current numbers. There are an estimated 129 million existing homes in the United States. We have experienced a 0.7% decline in ownership this year. So multiplying 0.7% times the existing housing stock, we end up with 916,847 fewer homes being required for owners. Let’s call that the negative demand. The estimated one-year growth in households this year is 1.3 million. Adjust that growth by 68.2%, the forecasted 2007 ownership rate, and you get a positive demand of 886,462 homes. Combine the negative demand with the positive demand and you get net negative demand, as the negative demand exceeds the positive demand. Is it any wonder that inventories of new and existing homes are not dropping? If it weren’t for offsetting demographic, migration and localized trends, there would be no significant demand for new housing in the current market. As long as affordability and credit tightening cause further dramatic declines in ownership, the impact to the annual number of new homes needed will be equally dramatic. And the impact will linger into future years. Stay tuned for a review of what this means to local markets. 
We're always looking for feedback from our readers.
|
))
| < Prev | Next > |
|---|
)){kind=link}