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Demographics and the Housing Industry

Changes in demographics in the United States may be working against an impending turnaround in the housing market. Since 1993, the inventory of excess housing units has climbed to approximately 2.4 million units, the highest level since 1970, according to the U.S. Census Bureau. At the same time, the number of household formations have been on a slight downward trend since 1970. Two other demographic trends suggest that this negative trend will continue: an aging population and more and more people waiting until they are older to get married. As this trend continues, fewer and fewer houses will be needed.

The recession is driving changes in demographics as well. In 1970, the average household size was 3.14 persons. In 2008, this number had dropped to 2.56 persons. Generally, this would mean a greater demand for housing. However, the data suggests that household size is increasing as adult children and their families return to their parents’ homes to ride out the economic storm.

Given these facts, we have two options for solving our housing crisis: either demolishing excess inventory or expanding our population. We think the housing problem is not going to be fixed without changes in demographics. This can be accomplished over the long-term with another baby boom. However, in the short-term, immigration may be the answer. One idea, floated by Richard LeFrak and Gary Shilling is the “Buy a home, get a green card” Program, which was described in a recent Wall Street Journal article.

Here’s how Forest2Market economists Mike Huebschmann and Tom Montzka describe the program: “ In a nutshell, immigrants with clean backgrounds and enough money to purchase — preferably outright — a reasonably priced house would be granted temporary residency for perhaps five years. To reduce the housing inventory, rules could be established preventing the new owners from renting out their houses for some period of time, or selling their homes unless they purchased replacements. Restricting the pool of candidates — at least initially — to those with enough assets to make an outright purchase would inject an immediate flush of cash directly in the U.S. economy. Also, it would likely also mean the green card recipients are well educated and able to contribute to the economy in other ways. At the end of the temporary residency period, those who maintained clean records and met any other program requirements would be granted citizenship.”

This program will undoubtedly be controversial. But it does have a precedent. According to LeFrak and Shilling, “The blueprint for a program to sell surplus housing to immigrants is already in place with the EB-5 visa program. Each year, 10,000 EB-5 visas for this country are available for foreigners who each invest $1 million in a new enterprise ($500,000 in economically depressed areas) that creates at least 10 full-time jobs. After two years, the entrepreneur and his family can become permanent residents.”

Because of the severity of the decline in the housing market and the number of American industries and workers that are affected by it, we think this plan warrants further investigation.