Intelligence

Real Estate on a Remarkably Sustainable Course

Milton Ezrati

Chief Economist

Only lingering fears from the 2008-09 crash can explain it. New home construction, pricing, affordability have all continued to support a remarkably orderly and most historically unusual improvement in the area. To be sure, new housing starts in June surged a powerful 8.3 percent from their May level, and prices have surged in select regions, but, otherwise, the improvement has flowed a conservative course, so much so that there is every reason to expect a continued expansion in new home construction and a continued advance in real estate prices for the foreseeable future.

The ultimate foundation, the pace of new household formation, continues apace. Media stories appear and reappear about how millennials have remained in the parents’ homes and cannot afford to start a separate household. No doubt these are true to the hardships facing this demographic, not the least because of the burden of college debt. But in aggregate, household formation has differed not at all from past periods that saw no such stories. It collapsed, of course, during the great recession and its aftermath, as it has briefly with every recession. But since 2010, the number of households in this country has expanded at 1.4 percent a year on average, a rate, for all the worry over millennials, just about the same as in past decades. One would have to go back to the 1970s, in fact, to find an appreciably higher growth rate.

On this basis alone, American homebuilders look remarkably timid. Earlier, when dealing with the overbuilding from before the financial crisis, it was only natural that they restrained any impulse to expansion. But during those years they thoroughly erased that overhang by cutting back new construction close to 75 percent. Now, if anything, they face the opposite situation. Since 2010 they have constructed only some 5.6 million new housing units even as the county has seen the formation of 7.2 million new households. The builders are, as a consequence, at least 1.6 million behind. The gap is probably wider, since new construction figures fail to take account of the structures that have become uninhabitable and those in areas where people no longer want to live.

With builders failing to keep up supply, it should come as no surprise that the inventory of unsold homes remains at an historically low 4.2 months’ supply at existing sales rates. Nor should it surprise that real estate prices have risen faster than the general rate of inflation. According to the National Association of Realtors, the price of existing homes in this country during the 12-months through to May, the most recent period for which data are available, rose 5.8 percent, against a less than 2.0 percent gain in consumer prices generally.

This picture points strongly to sustainable improvement going forward. The still wide gap between household formation and home construction certainly suggests a need. And there is every reason to expect that need to sustain demand. After all, price increases so far have done little to detract from home affordability, which, if it has deteriorated from the remarkable levels of 2012 and 2013, remains better than any other time during the last half century. If anything, good reason exists to anticipate an acceleration in the pace of home construction from the recent 2.0-3.0 average annual rate of increase, though not much repetition of the June surge.

(Image via Associated Press.)

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