| Estimating Demand for New Homes |
| Written by Jonathan Smoke | |
| 12.12.2007 | |
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Discuss this article on the forums. (0 posts) The Joint Center for Housing Studies at Harvard University recently published a new report, “Projecting the Underlying Demand for New Housing Units: Inferences from the Past, Assumptions about the Future,” that is a must read for any serious housing market researcher. The 48 page report is one of the best studies I have seen that provides solid national estimates of expected future demand for new housing. The report also details the methods and data sources used in such a way that market researchers can understand potential limitations of the data used. Perhaps somewhat controversial in today’s “doom sells” environment, the report has well-grounded optimistic projections for new housing demand through 2014. The study identifies that over the period of 2005 to 2014, 19.5 million units of total sustainable demand for new housing will exist. That equates to an annualized rate of 1.95 million new units per year, which include manufactured housing placements.  The authors point out that this estimate does not take into account the potential oversupply that was generated in the initial years of this forecasted period nor any oversupply carried into the period. After factoring in a conservative estimate of that oversupply condition being equivalent to 1 million units, the adjusted demand still equates to a very healthy 1.82 million units per year through 2014.I must admit that the numbers seemed high to me, but after reviewing the paper and sources used, I have to agree that I think the estimates are conservative. The authors also acknowledge that the two factors most likely to impact the real demand and housing completions experienced are the level of immigration and its impact to household growth, and the extent of the oversupply condition entering this forecasted period. Another takeaway from this report is that the extent of oversupply that was created—as much as 1 million new homes—may already have been somewhat reduced by a fall in completions this year. But they add this somber note about calling a bottom in 2008: “If completions remain at current levels through 2008, most of the oversupply may well be absorbed in an accounting sense. But if demand continues to remain suppressed, as it appears to be in 2007 as a result of tightening credit standards and sliding home prices, then the oversupply may not get worked off by the end of 2008.”
Regardless of that timing, eventually demand will be very healthy. Research today focused on potential deliveries in 2009 and beyond should be set against a much more favorable backdrop for demand. Demand cannot be suppressed forever. 
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