The Backlog of Housing Demand

During a recession, the natural and common reaction of many people is to consolidate households. Whether out of caution or necessity, people reduce their expenses by sharing the cost of living space. The trend toward consolidation in the most recent recession has yet to reverse itself. When it does, however, the overhang of housing inventory will quickly disappear, and we could very well be facing a housing shortage.

In “Pent-up Housing Demand: The Household Formations that Didn’t Happen—Yet,” the National Association of Home Builders (NAHB) argues that the supply and demand imbalance that currently exists in the housing market is not necessarily the result of overbuilding during the boom years. Instead, the report looks at the demand side of the equation, specifically at new household formation numbers, to determine exactly what shape the market would be in now if new household formation had continued the trend underway since 2000 of an average 1 percent growth per year. (The longer term trend is better. Since 1965, we’ve seen an average of 1.5 percent growth per year, approximately 1.3 million new homes.)

The NAHB took the average household growth rate of 1 percent per year and spread it across the decade to form a baseline of new housing demand. It then subtracted from that total the actual number of household formations that have taken place since the recession. What they found was that starting in 2007, household formations failed to keep pace with the 1 percent growth rate. The total number of household formations that have been postponed since that data is 2.1 million. Current inventory is estimated to be 3 million homes. If that 1 percent growth rate in household formations had continued throughout the decade, our current backlog of housing inventory would be 900,000.

According to the NAHB, “This insight has important implications for recovery in the housing market. If it was the case that the excess housing supply was ‘pure’ supply (i.e., assuming no pent-up demand), then recovery in the housing market would take as long as it takes for demographic forces to ‘catch up’ with supply (think birth rates 20-30 years ago). But, as this analysis indicates, the excess supply reflects . . . significant pent-up demand, implying that recovery in the housing market will come more quickly as the economic recovery makes progress and pent-up demand turns into realized demand, absorbing vacant units in the existing stock and adding pressure for the construction of new units.”