Verle B. Johnston

English

Research Papers in Economics

June 24,1983
Weknowthattherecord numberofhousing
starts in the 1970s was due primarily to the
rapid rate ofhousehold formation in that
decade. The numberofhouseholds formed
(17 million) between 1970and 1980
equalled 63 percentofthe 27 million popu-
lation increase in the 20-and-over age
Dubious demographics
The homebuying age groups generally are
con'sidered to be the population in the
20-24,25-34, and 35-44 age brackets. The
25-34 group is thought to be the principal
one, representing the bulkoffirst-time
homebuyers. The 35-44 yearold group con-
tains manyestablished homeowners whose
demand for new housing represents a desire
to upgrade existing shelter. In both cases,
the actllal demand for housing (including
rentals) is determined by the numberof
households formed in each group, rather
than the numberof individuals in the
groups, as several individualsmayshare one
housing unit.
One way in which we can judge whether
assumptions about household formation are
reasonable is to compare the projected
increase in households to the projected
increase in population in the homebuying
(and renting) age groups. A high ratio
ofincrease in households to increase in
population implies a high rate ofhousehold
formation.
cade ofthe 1980s compared with 17.2 mil-
lion in the 19705. The latter provided the
support for 18 million housing starts in the
1970s. The critical question for the 1980s is
whether the demographics will continue to
be as favorable to housing. An inspection
ofprojected changes in the population and
household formation ofpeople in the home-
buyingage groups in the 1980s suggests that
the numberofhousing starts in this decade
will not surpass the record number ofthe
1970s.
The projections indicate about 15.9 million
new households will be formed in the de-
The National Association ofHomebuilders
recently reaffirmed its forecast of 1.56
million housing starts in 1983 and a 1.76
million level in 1984. In making the latter
prediction, the Association noted that anal-
ysts and builders are starting to worry about
interest rate levels and the sustainability of
the recovery. The homebuilders earlier had
predicted a record level ofhousing con-
struction in the 1980s, based upon the chil-
dren born in the 1950s and 1960s reaching
the ages in which they will form households
and add tothedemand for housing, butthey
nowbelievethis prediction is toooptimistic.
While recent news about the housing mar-
ket has been encouraging to the housing
industry, a more careful look at the under-
lying demographics suggests that reduced
expectations are in order.
Recent and future activity
In 1982, the sales ofnew homes (at about
412,000 units) were at their lowest level
since the 1960s and housing starts (1.1
millionunits) wereat their lowest level since
1946., The situation, however, has changed
thus far in 1983. Through May, housing
starts were running about 50 percent above
the depressed 1982 level, and home sales
followed notmuch farther behind. The
renewed housing activitywas aided by a
substantial increase in the availability of
construction and mortgage financing and
a significant decline in the cost ofthat
financing.
Whether the recent activity portends a
record housing boom in the 1980s is adif-
ferent question. To a considerable extent,
such predictions have been based upon
Census Bureau projections ofhousehold
formations (Series B), which are themselves
based upon extrapolations ofthe trends in
marital and household status that occurred
between 1964 and 1978.
Record Housing Boom in the 1980s?
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1Opinions exprE.:ssed in this nevvsleHpr do not
necessarily reflect the vie\vs of thp rnanagelnent
()f tht;:., Federal Reserve Bank of San~ Francisco',
or of the Board of Coverrlors of thf' Federal
Reserve Svslem.
groups. Current Census projections forthe
decade ofthe 1980s assume an even higher
rate ofhousehold formation. They predictan
increase of23.7 million people 20-and-over
in age (3.3 million less than in the 1970s),
buthousehold formations ofabout 16 mil-
lion or about 66 percent ofthat population
increase.
The projections assume an especially high
rate ofhousehold formation for principal
homebuyers. Chart 1 (Census "middle
series" projections) shows that the popula-
tion ofthe 20-24 age group is expected to
decline by 3 million and that the population
ofthe 25-34 age group is expected to in-
crease by 6 million. Together, the two
groups will experience a net increase of3
million, but the numberofnew households
formed by these two age groups is projected
at4.6million (Chart 2). Newhouseholdsare
thus projected to equal 153 percent ofthe
population increase in those two age
groups; the corresponding percentage in
the 1970s was only 51 percent.
For the group 35-44 years old, the Census
predicts a population increase of 12.2
million and household formations of6.4
million or52 percent ofthe population
increase. The corresponding figures for the
1970s were a 2.5 million population-in-
crease and an almost matchinghousehold
increase of 2.4 million.
Income and price constraints
There are several reasons for believing that
the rate ofhousehold formation wiII be
lowerthan the current Census estimate for
the 1980s. (In fact, the tensus will be revis-
ing its projections in the months ahead to
take accountofdevelopments since 1978.)
In the 1970s, the rapid increase in house-
hold formations (in comparison to net popu-
lation changes) reflected a numberofsocial
and economic factors that may not be
present ormay not operate to the same
degree in this decade.
One such factor is the vastly increased dis-
parity between the costs ofowning a home
2
(house prices, financing costs, and mainte-
nance costs) and household incomes. Since
1980, and in spite ofthe recession, average
new homeprices have increased byan addi-
tional 15 percent to $87,900 in 1983'slirst
quarter. The increases about match the gain
in average household income, but the costs
ofmaintenance (due partly to soaring heat-
ing costs) have increased about 20 percent.
Moreover, the gains in average household
income apparently have not been shared by
potential householders in the crucial under-
34 age group, which nonetheless has been
projected toaccount for about 30 percent
ofall new household formations during the
1980s. Even assuming thatone can fing an
"average" new home for $87,900 some-
where in the U.s., hlonthlymortgage pay-
ments at today's average lending rate of
about 13 percentapproximate 38 percentof
averagehousehold income. This percentage
is almost double that in the early 19~Os
when mortgage rates averaged 8 percent
and newsingle family home prices, $30,500
(1972). The prospective huge federal
demands on the credit markets due to fed-
eral deficits also raise doubts as to whether
mortgage rates will fall significantly in the
nearfuture.
Ofcourse, housing prices are notdeter-
mined independently. Ifthe "affordability
constraint" becomes too binding, housing
prices will fall (or increase less slowly) to
reflect the reduced effective demand. Along
the way, however, theywill discourage high
rates ofhousehold formation.
A second factor holdingdown household
formation in the 1980s also involves the net
cost ofhomebuying. It is widely believed
that a significant partofthe increased
demand for housing in the 1970s was ofa
"speculative" nature. That is, households
reacted tothe environmentofrapid inflation
and preferential tax treatments for home-
ownership by buying homes fortheir ex-
pected capital gains. With lower inflation
contributing to more stable house prices in01960-1990
g\1jcl1&51 197o . 1980
Verle B. Johnston
Conclusion
Forecasts ofa record housing boom in
the 19S0s may be overly optimistic. They
are based upon extrapolations oftrends in
household formation from the mid-1960s to
the late 1970s that may notbe as strong in
the 1980s. Some ofthe heavy demands of
the 1970s was a response to socioeconomic
forces that are unlikelyto be repeated, or
at least are unlikelyto operateto the
same extent. Moreover, continued heavy
demand forhousingwilitosomeextenttend
to be self-limiting, as constraints on afford-
ability and availability discourage house-
hold formation.
effective housingdemand, while public
policy in the area ofhousing subsidy pro-
grams may work in the opposite direction,
since such programs as the multi-billion
dollarSection 8 rental subsidy program will
be phased out.
At the same time, a relatively high level of
starts may be associated with demographic
shifts to growth areas such as the South and
West where vacancy rates are already low,
but a mitigating circumstance is simply that
no one, native born or in-migrant, has ever
brought land with him. Home prices (and
rentals) in growth areas such as California
should therefore reflect this relative
constraint and remain higherthan the na-
tional average, thus discouraging some of
that demand. '
under 25 25·34 35·44 45 +
Ago Group
·3
2
6
ill.
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4
Chart 2
CHANGE IN HOUSEHOLD FORMATIONS
Millions
8
45+
10
8
8
4
~
2 "IJ
~
0
1J~;
-2
20-24
Other factors
There are, ofcourse, otherelements in the
housing equation that will help determine
the rate ofnew construction. These include
the rate ofremoval ofexisting structures
from the housing stock and conversions.
"Creative financing" techniques such as
equity participations may serve to increase
Chart 1
CHANGE IN POPULATION
Millions
12
A third factor is sociological. The numberof
households formed by other than married
couples rose by 12 million (70 percent) in
the 1970s and accounted for 76 percent of
all household formations. A sharp rise in the
numberofsingle and divorced or separated
women increased thedemographicdemand
for housing, but it is unlikely that this phe-
nomenon will be repeated in the 1980s. A
similar phenomenon was the continued rise
during the 1970s in the numberofmarried
women in the laborforce; they augmented
effective housingdemand-adding upward
pressure to home prices-by providing
a second income to accommodate rapidly
rising home prices. But, since female labor
force participation rates are now very high
by past standards, it is unlikelythatthis force
will operate in the 1980s to the same extent
it did in the 1970s.
the 1980s (although they still seem likely to
increase faster than household incomes),
prospective homebuyers presumably will
have less incentive to buy houses forspecu-
lation and will be more likely to viewthem
once again as a source ofshelter.SS'ltl~ J.StJl:I
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BANKING DATA-TWELFTH FEDERAL RESERVE DISTRICT
(Dollar amounts in millions)
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Selected Assets and liabilities
largeCommercial Banks
Amount
Outstanding
6/8/83
Change
from
6/1/83
Change from
year ago
Dollar Percent
loans (gross} adjusted) and investments'" 163,116 76 2,587 1.6
loans(gross, adjusted) - total# 141,453 - 31 1,798 1.3
Commercial and industrial 44,303 23 285 0.6
Real estate 56,161 - 46 - 1,128 - 2.0
loansto individuals 23,679 21 354 1.5
Securities loans 2,919 278 734 33.6
U.S. Treasury securities* 8,215 133 1,716 26.4
Other securities* 13,448 - 27 - 927 - 6.4
Demand deposits - total# 41,107 -3,777 2,151 5.5
Demand deposits - adjusted 29,420 1,546 1,341 4.8
Savings deposits - totalt 67,573 357 36,439 117.0
Time deposits - total# 64,387 247 - 31,034 - 32.5
Individuals, part. & corp. 58,100 185 - 27,416 - 32.1
(large negotiableCD's) 18,222 - 42 - 17,280 - 48.7
Weekly Averages
of Daily Figures
Member Bank,Reserve Position
Excess Reserves (+)/Deficiency(-)
Borrowings
Net free reserves (+)/Net borrowed(-)
Weekended
6/8/83
147
72
75
Weekended
6/1/83
104
110
6
Comparable
year-ago period
95
199
, 104
* Excludes trading accountsecurities.
# Includes items notshown separately.
t Includes Money Market Deposit Accounts, Super-NOW accounts, and NOWaccounts.
Editorial COmmentsmay beaddressed totheeditor(Gregory Tong) ortotheauthor.•..Freecopies of
this and other Federal Reserve publicationscan be obtainedbycallingorwriting thePublic Infor-
mation Section, Federal Reserve Bank of San Francisco, P.O. Box 7702, San Francisco'94120. Phone
(415) 974·2246.

Record housing boom in the 1980s?

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Record housing boom in the 1980s?

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Research Papers in Economics