The Mortgage Corner
We will know when real estate is in recovery by an increase in the number of new households being formed. The Census Bureau has estimated that just 357,000 new households were formed in the year ending March 2010, when its data were last updated. But analysts are predicting more like 1 million households will be formed in 2011 by children moving away from their parents’ household, as economic conditions—such as job formation—continue to improve.
Many young folk will rent, of course, but with rents rising and mortgage rates and housing prices extremely low, those with good jobs will be tempted to buy housing. And we know why. There are almost no new homes being built.
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| 2005 | 2006 | 2007 | 2008 | 2009 | 2010 | 20111 |
| 1 to 4 Units | 1,673.4 | 1,695.3 | 1,249.8 | 842.5 | 534.6 | 505.2 | 450.0 |
| 5+ Units | 258.0 | 284.2 | 253.0 | 277.2 | 259.8 | 146.5 | 100.0 |
| Manufactured Homes | 146.8 | 117.3 | 95.7 | 81.9 | 49.8 | 50 | 50 |
| Sub-Total | 2,078.2 | 2,096.8 | 1,598.5 | 1,201.6 | 844.2 | 701.7 | 600.0 |
| Demolitions | 200 | 200 | 200 | 200 | 150 | 150 | 150 |
| Total added to Stock | 1,878.2 | 1,896.8 | 1,398.5 | 1,001.6 | 694.2 | 551.7 | 450.0 |
Calculated Risk recently put out a table of housing production. Numbers are in thousands. It shows what happened during the bubble years 2005-07. More than 5 million units were added to the housing stock, while household formation averaged 1 million per year. So even if all bought homes—and no more than 50 percent actually did—there would be a 2 million unit excess left languishing on the market. Analysts estimate up to 3.5 million were in excess during the Great Recession, and that number has been whittled down to less than 1 million since then.
“In 2010, 1 to 4 unit completions were at a record low 505 thousand,” says Calculated Risk. “This was just below the 535 thousand units completed in 2009 and was far below the previous record low of 712 thousand units in 1982. 1 to 4 units completions are currently on pace for another record low in 2011.”
So an uptick in household formation should boost housing sales, and so reduce the excess inventory—now in the 7 month range for existing homes, and 8 months for new homes on the market. One favorable indicator is pending home sales scheduled to close in 30 to 60 days have also risen over the past two months.
Pending sales jumped 5.1 percent in March due, according to the National Association of Realtors, to better affordability, rising rents and job creation. March's gain was strongly centered in the largest region which is the South where contracts jumped 10.3 percent. Notably, the South had been hard hit by adverse winter weather in February. “The latest report raises the possibility that modest momentum may once again be building for the existing home market,” says Econoday. Pending home sales are based on contract signings for existing home sales instead of actual closings which show up in existing home sales data. Pending sales tend to lead existing sales by one to two months, as we said.
It is not just household formation that spurs housing sales, of course. Existing renters will want to own homes when they feel more secure in their jobs, and see housing prices begin to rise again. Case-Shiller says housing prices were holding or rising in just 8 of the 20 metro areas tracked as of February 2011, however.
“The one positive is Washington D.C. with a positive annual growth rate, +2.7 percent, and home prices more than 80 percent over its January 2000 level. Other cities holding on to large gains from 11 years ago include Los Angeles (68.25 percent), New York (65.19 percent) and San Diego (55.05 percent)”
Harlan Green © 2011
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