What Will Unlocked Pent-Up Housing Demand Look Like?

NAHB has estimated that as a result of current economic conditions, there are approximately 2.1 million households that were expected to form in the last few years but did not. These “potential” households typically represent people doubling and tripling up on roommates and young adults living with parents.

Unlocking this pent-up demand, a process that will be facilitated by an improving job market, will help reduce the excess inventory of homes.

However, given ongoing challenges associated with obtaining mortgage credit and faulty appraisals, it is incorrect to assume that all of these potential households will become homeowners. Data from the American Housing Survey (AHS) can help estimate what form unlocked pent-up demand will take.

The chart above presents data from the 2005, 2007 and 2009 editions of the AHS. The data illustrate the number of households who reported that their primary reason for moving to a new housing unit was “to establish a new household” (*see data footnote below on difference between gross and net household formations).

As can be seen above, the numbers of such new households fell as the economy entered the Great Recession. Moreover, the share of these newly formed households that became owner-occupiers fell as well, from 38% in 2005 to less than 32% in 2009.

The lesson that can be drawn from the AHS data is that as pent-up demand is unlocked, approximately 70% of these new households are likely to become renters. Nonetheless, as rental vacancy rates continue to fall, these new renting households will increase rental demand, push up rents and cause existing renters to become homeowners. It is important to note that this process could be slowed due to increasing requirements for downpayments and obtaining mortgage credit.

The analysis here suggests that unlocking pent-up demand could, in the short-run, cause the homeownership rate to fall, as many of the new households added will be renters. While this effect should be temporary, it does add another dimension to the ongoing debate among economists and housing analysts regarding what the low point will be for the homeownership rate as the housing market recovery gains momentum.

* Data footnote – it is important to note that the numbers in this analysis represent gross household formations - not net. That is, the numbers do not account for households that were lost during each period. For example, the AHS data indicate that between 2007 and 2009 1.114 million net households were added. This number is determined by subtracting households that were lost from the gross household formations total. The focus here is the tenure choice of the flow of new households will take, so the gross numbers are used.

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15 Responses to What Will Unlocked Pent-Up Housing Demand Look Like?

  1. Kevin Dalton says:

    Good read, seems to me it will not be a over flow of customers. However, a gradual increase over the next several years as potential new households “tip-toe” back out into the housing market.

  2. Statistically speaking, this has to signal an eventual turn around. At the turn of the century the current decade was projected to be the best that housing has ever seen.
    Here’s the question; when will the statistics begin bearing fruit?

    • Robert Dietz says:

      Mark —

      To borrow your metaphor, it is not only a question of when, but will the demographic statistics bear fruit….or vegetables? Homebuyers and renters tend to look for different types of structures, so that will have an impact on who builds what.

      • At first, you’re going to see those new households, which can afford to form, move into apartment buildings and other multifamily units. Then, as they become economically comfortable, and are able to afford the new 20% down being required for single family housing, we’ll see them migrate into houses of their own. BUT, I sure don’t see that happening quickly, except in places like the Dakotas, which are currently booming.

        What was the number that I heard a few weeks ago on NPR??? “A large percentage of college students are moving back home after they graduate, because they can’t get jobs, and don’t have the spirit of adventure that we had in the old days, when we were willing to move all the way across the country for a job.”

  3. [...] a blog post on its market-based experimentation, the NAHB stated that a considerable number of households were [...]

  4. [...] a blog post on its market-based experimentation, the NAHB stated that a considerable number of households were [...]

  5. [...] The job openings rate (the red line below) continued on its post-Great Recession upward trend. It now stands at 2.6%. The upward trend in open positions bodes well for further job creation in 2012, which in turn should help support demand for both owner-occupied and rental housing. [...]

  6. [...] of job openings has had an upward trend and is a cause for optimism about household formations and housing demand in the medium [...]

  7. [...] at the macro level, the fate of the ongoing recovery in housing is dependent on economic growth, job creation and household balance sheet repair. If all of the [...]

  8. [...] on a year-over-year basis. Apartment demand has picked up over the past few years as the share of newly-formed households entering the rental market has risen appreciably. The rental vacancy rate slid to a nearly decade [...]

  9. [...] on a year-over-year basis. Apartment demand has picked up over the past few years as the share of newly-formed households entering the rental market has risen appreciably. The rental vacancy rate slid to a nearly [...]

  10. [...] forms of household sharing are untenable over the long-run. As economic conditions improve, this pent-up housing demand will be unlocked, increasing the need for rental and owner-occupied [...]

  11. […] The economic well-being of those 18 to 31 is of particular interest as these individuals represent future consumers of housing. At some point, many of the 21.6 million Millennials living at home will move out. Past trends suggest most of these new households will be renters first. […]

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