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| Locality Impacts Demand |
| Written by Jonathan Smoke | |
| 08.10.2007 | |
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Discuss this article on the forums. (0 posts) Over the last week I have been reviewing declines in home ownership and what that means for new home demand. Yesterday I showed that at a national level, the decline in ownership in 2007 essentially produced net negative demand for new homes.  But when we look at the local level, the picture is more complex as several factors can influence demand for new homes. For example, migration that exceeds census estimates will cause a greater need for new housing. Shifts in demographic patterns from younger to older, less educated to more educated, and lower income to higher income households will lead to more demand for new housing.Likewise, a relatively old housing stock and aged housing stock in areas that are experiencing a rebirth will generate a need for new housing. As we attempt to help our clients understand where demand or lack thereof will be most significant, we are paying very close attention to understanding consumers and demographics. Location Matters Areas likely to be impacted by declines in ownership brought on by affordability and credit tightening will be areas that have relatively large consumer segments with wealth, credit or income constraints. Higher rates, tighter credit, and fewer options for low or no down payments will constrain the young in the entry-level market. Lower income segments will also be forced out of the entry-level market. And in areas with relatively low affordability, “lower income” segments include some relatively high income levels. That means once we get beyond the near to medium-term inventory issues--barring some miracle innovation for affordable housing--we are likely to see far less demand over the next several years for entry-level housing in most markets. And the “double doozie” will occur in the least affordable markets as entry level will return to renting and even “move up” may have limited options to make home ownership a reality. Rent vs. Own Homeownership rates already vary dramatically across the US. In very affordable areas in the south, home ownership is as high as 87%. Ownership drops to the 40s% in college and university dominated markets and in the least affordable markets like New York, Los Angeles and San Francisco. While credit tightening may be a national issue, its impact on home ownership rate changes is likely to vary dramatically across markets, reflecting the affordability and demographic differences that exist. On the positive side of the ledger, demographic trends of increasing incomes, aging households, migration to less expensive markets, and higher levels of education should help increase the demand for housing in many markets. Therefore, as long as investors, developers and builders intelligently pick customer segments and geographies, it will be possible to outperform the overall market. 
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