Big Deficit of New Single-Family Homes Will Need to Be Addressed as Economy Improves
Annual single-family housing production in 2008 and 2009 fell about one million units short of the housing that would be needed in a normally functioning economy, suggesting that builders will have a lot of catching up to do as the economy improves and household formations return to trend levels, according to a special study by NAHB’s Housing Economics.
With builders remaining cut off from the financing they need from banks to renew production and the marketplace not performing as well as originally expected, 2010 is likely to add another one million units to the growing deficit of single-family housing, according to the report, “Extent of Underbuilding in the Single-Family Housing Market,” which was prepared by NAHB economists Robert Denk and Paul Emrath.
The report finds that there was an excessive amount of single-family building from 2003 through 2005, but overbuilding largely ended by 2006 and the subsequent downturn was severe enough to more than offset those annual surpluses.
“As a result, the single-family housing market in the U.S. currently finds itself in a significantly underbuilt state — in the sense that excess or pent-up demand for new construction exists, compared to the long-term trend we would see if housing, labor and credit markets were functioning normally and generating a normal rate of household formations,” the report says.
The analysis used building permits for single-family homes rather than housing starts because they are based on a much larger sample and provide more geographic detail, which enabled the analysis to be extended to the state level. Both single-family permits and starts have tracked each other closely in current years.
The study found that underbuilding is occurring in most of the states, including those that saw the most overheated housing markets at the height of the boom.
A Record Trough in 2009
Single-family permits plunged to a trough of 441,000 in 2009, even lower than in the previously worst housing recession since World War II, which occurred in 1981, when 550,000 single-family permits were recorded.
“Even this understates the magnitude of the recent downturn in the housing industry to some extent,” the report says, because multifamily starts and permits last year declined to an historic lows of fewer than 150,000 units, compared to about 400,000 units annually during the early 1980s.
“Moreover, the population and stock of housing in the U.S. has continued to expand,” the report says. “In 1980, there were roughly 226 million people and 88 million housing units in the country. By 2009, these numbers had increased to 307 million people and 130 million housing units, so in that year the U.S. added a record low number of new housing units to a population and housing base that was larger than it had ever been before.”
From 1988 through 2003, the U.S. population was growing at a fairly steady rate that averaged 1.15% annually and varied only between 0.90% and 1.35%. Over this period — which goes right up to the housing boom years of 2004 and 2005 and can be considered a fairly normal one for housing — the number of single-family permits issued was increasing at an average of about 36,000 per year, consistent with a growing population that needs housing and an expanding inventory of older homes that need to be replaced.
A 3.28 Million Unit Deficit
Projecting that trend past 2003, single-family permits should have hit 1.4 million by 2005, 1.5 million by 2008 and been around 1.56 million in 2009, the report finds. Instead, permits were well over 1.4 million in 2003 and pushed past 1.6 million in both 2004 and 2005, “a period of serious overbuilding.”
Subsequently, however, permits dropped to under 1.4 million by 2006 — already slightly below trend — and continued to fall, reaching the historic low point of roughly 440,000 units in 2009.
Single-family surpluses occurred in the period from 2002 to 2006 and they were well over 200,000 annually in 2004 and 2005, the study calculates.
However, after 2005 “annual permit deficits began to materialize. These deficits were about a half million units in 2007, and in the neighborhood of a million units since then, as the rate of single-family permit issuance dropped to under 500,000 — more than a million units per year below trend.”
The NAHB economists conclude that accumulating annual surpluses peaked at 493,000 single-family units in 2005, and that was worked off entirely by the end of 2007, as annual production dropped below one million units.
The continuing depressed levels of single-family housing production since then resulted in cumulative underbuilding of 2.17 million units by 2009, and will likely grow to 3.28 million by the end of this year. “This represents cumulative underbuilding after earlier overbuilding surpluses have been entirely worked off,” according to the report.
Cumulative underbuilding, to various extents, exists in 45 of the 50 states and the District of Columbia, according to calculations by the NAHB economists.
The exceptions are Alabama, Washington, D.C., Hawaii, Montana, North Dakota and Wyoming. Washington, D.C. constitutes a relatively small part of a larger local housing market and its single-family housing accounts for less than 40% of its total housing stock. The other states continued to accumulate housing surpluses until 2008, when their cumulative overbuilding began to be worked off.
States that saw the hottest markets during the boom all now have single-family housing deficits, according to the report: Arizona, a deficit of 144,500; California, 49,500; Florida, 112,600; and Nevada, 75,600.
“It is probably not surprising that household formations have stalled and remain depressed while the national unemployment rate is above 9%,” the study concludes. “But it would be difficult to explain why households would choose to remain bundled together after house prices stabilize and labor markets improve.”
The cumulative housing deficit, the report says, represents “a significant pent-up demand that will at some point need to be worked off and begin to impact single-family housing production in a positive direction.”
To read the entire report, click here.