The housing industry has been a bright spot in the post-pandemic economic recovery, and we expect the strength in this space to continue. Demand for housing is expected to continue to outstrip supply for some time, especially given recent disruptions in the supply chain for raw materials and labor. As these disruptions subside, we expect housing starts and completions to exceed demand as the gap is closed.
As shown in the graph below, the annual number of completed housing units greatly exceeded the average household change during the housing boom that began in the mid-2000s. However, housing completions were below the average change in household formation from 2007 to 2019, as the economy digested the impact of more than a decade of oversupply, among other factors. In fact, annual new home completions have only increased to meet the average annual rate of household formation just before the pandemic in 2019. Merely keeping up with the average rate of household formation is expected to create strong tailwinds for the future. housing industry, but there is still more pent-up demand in the housing system.
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Over time, the annual rate of new home construction is expected to exceed household formation due to the number of replacement homes needed each year as older homes are destroyed or converted to other uses. These lost homes must be replaced to meet the demand for housing. However, the recent dynamics of the housing industry have led to a decline in the construction of replacement housing during the period 2009-2019, and this trend has led to surprising results. The National Association of Homebuilders (NAHB) noted in its 2018 review of housing trends from 2014 to 2017 that homes are expected to last longer due to the lack of new housing construction ^. While it is possible to keep houses built before the late 1980s or even before 1960 habitable for some time, the assumed loss rates currently stand at 0.75% and 2.98% per annum ^. These low rates of loss are not sustainable in the long run, especially given advancing housing technology requirements and improvements in local housing codes. Additionally, NAHB projections using 2017 housing starts and loss rates released by the US Census Bureau indicated that 45% of the US housing stock was built before 1970 ^.
Clearly, these trends of under-building new homes relative to natural demand are not sustainable. We believe that the combination of high demand and limited supply will ultimately fuel the housing industry through volatility caused by current supply chain constraints as a new equilibrium is struck in coming years. Despite headwinds in the supply chain, the housing industry is expected to remain a bright spot in the US economy.
^ Emrath, Paul. “More new homes are needed to replace old inventory. Special Studies, NAHB Economics and Housing Policy Group, August 2, 2018. https://www.nahbclassic.org/generic.aspx?sectionID=734&genericContentID=263243
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