Housing in the Long Term: Trends and Prospects
Tuccillo, John A., Business Economics
The long-term prospect for housing has interest for a variety of reasons. Historically, housing, particularly home construction, has led the macroeconomy both into and out of recessions. As such, it has been both a leading indicator and a lever of public policy - although in the latest attempt by the Fed to slow the economy, housing has been remarkably unwilling to play this role. At the industry level, the demand for housing is linked to the economic health of a number of industries, ranging from building materials like lumber to finished goods like furniture and appliances.
It is thus useful for business economists to track the course of the housing sector, whether or not it directly impacts their industries. Unfortunately, while we are relatively certain as to the level of construction and sales activity over the coming year (or even two years), long-term forecasts for housing vary greatly, depending on one's view of the course of macroeconomics variables, economic policy directions, and household formation rates. Therefore, this article does not contain a forecast of housing demand into the future. Rather, it looks at the trends now shaping up in the economy that must affect any specific forecast.
Looking long term at both the economy and housing is both easier and harder than forecasting for the short term. It's more difficult because the policy context that has so much to do with both is unfathomable. Right now, we'd really like some certainty about whether the economy is weaker or stronger than the Fed assumes, how fast foreign economics will recover, what shocks lie in wait that no one can envision. The best we can say is that the 1990s will be a decade of relatively slow but steady growth with (in spite of the protestations and policies of the Fed) low inflation and interest rates. We know that there will be at least one recession, and the only guideline we have is that recessions begin on average thirty months after the Fed initially tightens monetary policy. As an aside, since the Fed first moved this last February, the reelection prospects for Mr. Clinton get even more interesting.
But the long view is also easier because one can concentrate on the trends that affect markets without the need for specifics. We can afford to be a bit more conjectural and futuristic in thinking about housing markets over the next twenty years, figuring out trends that not only will emerge, but also those that only may become reality.
Right now the systemic factors that affect the course of the housing sector are undergoing rapid and significant changes. Let's examine four of these.
Because housing is about people, you can't escape this one. Interest rates and economic fluctuations aside, people live in households and buy homes to the extent they are able, so that housing demand relies ultimately on household formations and job creation. Moreover, for the specific industries associated with residential construction, the composition of those households also matters greatly.
I would argue that the next fifteen years will bring about a profound shift in the nature of housing demand because of significant changes in both the number and types of households. As far as the number is concerned, we have already seen upward revisions of household formation projections by the Bureau of the Census; more will come. As far as household types, changing lifestyles and ethnic diversity will have a strong impact on the housing market.
There are three significant purely demographic and one demographically related trends that will shape the course of housing over the next decade and a half:
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Conventional wisdom says that the housing market is driven by the first-time buyer. For much of the past fifty years, this was true. But, by the turn of the century, the leading edge of the baby boom will reach age fifty-four, and the tailing edge thirty-six. …