How Bad Is The Housing Market? A Forecast Update for 2014-2015




Homebuilders are not so happy anymore, according to their national trade association. After eight months with a majority of builders feeling positive, the pessimists have started to gain ground. (In addition to the attitude survey shown in the chart, January housing starts fell due to the bad weather.) Does this mean a bust for homebuilding and home prices in 2014?

Not so fast. Let’s look at the fundamentals of supply and demand. Last year, new housing completions totaled less than one million units (counting both single-family and multi-family construction and adding in manufacturing housing).

Our average need for new housing units is . . . what? Looking at population growth, we seem to need about 900,000 new units. That looks at the increase in population divided by the average household size. However, if we instead look at the estimated number of new households, we need almost 1.4 million new housing units. Why the difference? In the recession, adult children moved back in with their parents. So in 2009, we added just 400,000 net new households despite an additional 2.5 million people. (On average we live about 2.5 people per household.) Looking forward, if adult children move out from their parents, and singles with roommates get their own pads, then we need more housing than we’re building. On the other hand, if the adjustment is finished, then we don’t need so many houses.


Notice that I’m ignoring what housing analysts sometimes call “inventory,” which is those houses that are listed for sale. I don’t much care whether the house is formally on the market or not. There is supply, and there is demand. Bank-owned real estate may change the timing of the market’s reaction to supply-demand imbalance. Mortgage lending regulations may change the mix of demand between owned and rented housing. Fundamentally, though, the market is based on the total number of households and the number of housing units available.

Given the improvement in jobs (gradually but certainly improving), more younger people are likely to move out, either from their parents or from roommates. I’m inclined to think we need more like 1.2 million housing units this year and a like amount next year.

Today’s construction pace is too light, and homebuilders should be optimistic. However, this household formation rate is sufficiently flexible that the population-housing construction link does not work in every single year. Further, it makes a lot of difference to homebuilders whether people are buying single family homes or renting apartments, even if it doesn’t matter much to us economists.

Moreover, surveys of attitudes are likely to be much more variable than “hard” data, such as actual sales or construction. So long as the economy does not re-tank, then housing demand should continue to be firm.

As for the mix, rising incomes usually lead to a preference to buy rather than rent, but less the slightly less favorable mortgage lending environment will dampen that effect—but not eliminate it. Thus, I forecast moderate gains in home construction and mild price appreciation in 2014 and 2015.

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Bill ConerlyBill Conerly

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Buying A New Home and What to Look For During the Final Walk

A ‘Walk Through’ With Your Home Builder

When your brand new home is almost complete and ready to move into, your excitement can often lead you to overlook or miss problems with the construction. Before hand over, you will be required to conduct a ‘walk through’ with your home builder to ensure that everything is according to your plan and the contract you have signed.
  • Check that windows are square and tightly fitting. They should have weather stripping and flawless glass.
  • Use a pair of binoculars to scan the roof for flat, tight shingles. You should also check out the gutters and downspouts.
  • Check that the ground has proper grading; it should slope away from the foundations with no serious erosion.
  • Turn on all of the faucets to determine that hot and cold are on the correct sides. Also check that water drains quickly.
  • Test all of the electrical outlets (a hairdryer is handy for this), garage door openers and doorbells to see that they work.
  • Check the carpet in each room for matching seams and check for ridges in vinyl or laminate flooring.
  • Open and close all windows and doors; they should provide a good seal when closed and not bind.


Whilst conducting a walk through with your home builder may seem a little stressful – they will be watching you like a hawk to make sure that there are no issues – it is an important part of the hand over process. If you are wary or nervous about missing something, take along a checklist with you to ensure that you scrutinize every aspect.
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New Home Buyer Income Disparity Research

Income Disparity Between New and Existing Home Buyers Widens

New research from NAHB finds a growing disparity between the median income of all home buyers and the median income of new home buyers.

According to the 2011 American Housing Survey (AHS), home buyers overall had a median income of $64,998.  The subset of home buyers that bought new homes had a median income of $81,715, about 26 percent more than the median income of all home buyers.  This spread is the largest it has been since before the 2001 AHS.

Graph 1. Percent Above or Below the Income of All Buyers


The subset of home buyers that bought a home for the first time had a median income of $59,946, about 8 percent less than the median income of all home buyers.  The disparity between the income of all home buyers and first-time home buyers is shrinking—this spread is the smallest we have seen since before the 2001 AHS.

New home buyers are purchasing more expensive and larger homes when compared to all home buyers.  The median market value of a new home purchased is $230,000 and the median size is 2,100 square feet.  According to NAHB’s recent report “What Home Buyers Really Want” , buyers expect to pay a median of $203,900, and would like a median of 2,226 square feet.

The median value of all homes purchased dropped $35,000 between 2007 and 2009, but only $10,000 between 2009 and 2011.  The median value of new homes purchased was stable at $230,000 in both 2009 and 2011.

Graph 2. Median Market Value of Homes Purchased


Between 2009 and 2011, 1.6 million fewer households bought a home than between 2007 and 2009—8.4 million households bought a home in the 2009 study, compared to 6.4 million in the 2011 study.  Of those that bought a home, only 8 percent bought a new home.  This is down from 17 percent of households who bought a new home in the 2009 study.  According to “What Home Buyers Really Want”, 55 percent of home buyers (prospective and recent) would prefer to purchase a new home.

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