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.