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June 24,1983
Record Housing Boom in the 1980s?
The National Association of Homebuilders
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 analysts and builders are starting to worry about
interest rate levels and the sustainability of
the recovery. The homebuilders earlier had
predicted a record level of housing construction in the 1980s, based upon the children born in the 1950s and 1960s reaching
the ages in which they will form households
and add to the demand for housing, but they
now believe this prediction is toooptimistic.
While recent news about the housing market has been encouraging to the housing
industry, a more careful look at the underlying demographics suggeststhat reduced
expectations are in order.
cade of the 1980s compared with 17.2 million 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
of projected changes in the population and
household formation of people in the homebuying age groups in the 1980s suggeststhat
the number of housing starts in this decade
will not surpass the record number of the
1970s.
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 bulk of first-time
homebuyers. The 35-44 year old group contains many established 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 number of
households formed in each group, rather
than the number of individuals in the
groups, as several individuals may share one
housing unit.
Recent and future activity
In 1982, the sales of new homes (at about
412,000 units) were at their lowest level
since the 1960s and housing starts (1.1
million units) were at 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 not much farther behind. The
renewed housing activity was aided by a
substantial increase in the availability of
construction and mortgage financing and
a significant decline in the cost of that
financing.
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
of increase in households to increase in
population implies a high rate of household
formation.
Whether the recent activity portends a
record housing boom in the 1980s is a different question. To a considerable extent,
such predictions have been based upon
Census Bureau projections of household
formations (SeriesB), which are themselves
based upon extrapolations of the trends in
marital and household status that occurred
between 1964 and 1978.
We know that the record number of housing
starts in the 1970s was due primarily to the
rapid rate of household formation in that
decade. The number of households formed
(17 million) between 1 970and 1980
equalled 63 percent of the 27 million population increase in the 20-and-over age
The projections indicate about 15.9 million
new households will be formed in the de1
Opinions exprE.:ssed in this nevvsleHpr do not
necessarily reflect the vie\vs of thp rnanagelnent
()f tht;:.,Federal Reserve Bank of
Francisco',
or of the Board of Coverrlors of thf' Federal
Reserve Svslem.
(house prices, financing costs, and maintenance costs) and household incomes. Since
1 980, and in spite of the recession, average
new home prices have increased by an additional 15 percent to $87,900 in 1983's lirst
quarter. The increases about match the gain
in average household income, but the costs
of maintenance (due partly to soaring heating costs) have increased about 20 percent.
groups. Current Census projections for the
decade of the 1980s assume an even higher
rate of household formation. They predict an
increaseof23.7 million people 20-and-over
in age (3.3 million less than in the 1970s),
but household formations of about 16 million or about 66 percent of that population
increase.
The projections assume an especially high
rate of household formation for principal
homebuyers. Chart 1 (Census "middle
series" projections) shows that the population of the 20-24 age group is expected to
decline by 3 million and that the population
of the 25-34 age group is expected to increase by 6 million. Together, the two
groups will experience a net increase of 3
million, but the number of new households
formed by these two age groups is projected
at4.6 million (Chart 2). New households are
thus projected to equal 153 percent of the
population increase in those two age
groups; the corresponding percentage in
the 1970s was only 51 percent.
Moreover, the gains in average household
income apparently have not been shared by
potential householders in the crucial under34 age group, which nonetheless has been
projected to account for about 30 percent
of all new household formations during the
1980s. Even assuming that one can fing an
"average" new home for $87,900 somewhere in the U.s., hlonthlymortgage payments at today's average lending rate of
about 13 percent approximate 38 percent of
average household income. This percentage
is almost double that in the early
when mortgage rates averaged 8 percent
and new single family home prices, $30,500
(1 972). The prospective huge federal
demands on the credit markets due to federal deficits also raise doubts as to whether
mortgage rates will fall significantly in the
nearfuture.
For the group 35-44 years old, the Census
predicts a population increase of 12.2
million and household formations of 6.4
million or 52 percent of the population
increase. The corresponding figures for the
1970s were a 2.5 million population-increase and an almost matching household
increase of 2.4 million.
Of course, housing prices are not determined independently. If the "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 of household formation.
Income and price constraints
There are several reasons for believing that
the rate of household formation wi II be
lower than the current Census estimate for
the 1980s. (In fact, the tensus will be revising its projections in the months ahead to
take account of developments since 1978.)
In the 1970s, the rapid increase in household formations (in comparison to net population changes) reflected a number of social
and economic factors that may not be
present or may not operate to the same
degree in this decade.
A second factor holding down household
formation in the 1980s also involves the net
cost of homebuying. It is widely believed
that a significant part of the increased
demand for housing in the 1970s was of a
"speculative" nature. That is, households
reacted to the environment of rapid inflation
and preferential tax treatments for homeownership by buying homes for their expected capital gains. With lower inflation
contributing to more stable house prices in
One such factor is the vastly increased disparity between the costs of owning a home
2
the 1980s (although they still seem likely to
increase faster than household incomes),
prospective homebuyers presumably will
have less incentive to buy houses for speculation and will be more likely to view them
once again as a source of shelter.
effective housing demand, while public
policy in the area of housing subsidy programs may work in the opposite direction,
since such programs as the multi-billion
dollar Section 8 rental subsidy program will
be phased out.
A third factor is sociological. The number of
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
number of single and divorced or separated
women increased the demographic demand
for housing, but it is unlikely that this phenomenon will be repeated in the 1980s. A
similar phenomenon was the continued rise
during the 1970s in the number of married
women in the labor force; they augmented
effective housing demand-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 unlikely that this force
will operate in the 1980s to the same extent
it did in the 1970s.
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 higher than the national average, thus discouraging some of
that demand.
'
Conclusion
Forecastsof a record housing boom in
the 19S0s may be overly optimistic. They
are based upon extrapolations of trends in
household formation from the mid-1 960s to
the late 1970s that may not be as strong in
the 1980s. Some of the heavy demands of
the 1970s was a response to socioeconomic
forces that are unlikely to be repeated, or
at least are unlikely to operate to the
same extent. Moreover, continued heavy
demand for housing wi lito some extent tend
to be self-limiting, as constraints on affordability and availability discourage household formation.
Verle B. Johnston
Other factors
There are, of course, other elements in the
housing equation that will help determine
the rate of new construction. These include
the rate of removal of existing structures
from the housing stock and conversions.
"Creative financing" techniques such as
equity participations may serve to increase
Chart 1
Millions
CHANGEIN POPULATION
12
Chart 2
CHANGE IN HOUSEHOLD FORMATIONS
10
Millions
8
8
8
6
4
4
2
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BANKING DATA-TWELFTHFEDERAL
RESERVE
DISTRICT
(Dollar amountsin millions)
SelectedAssetsand liabilities
large Commercial Banks
loans (gross}adjusted)and investments'"
loans (gross,adjusted)- total#
Commercialand industrial
Realestate
loans to individuals
Securities loans
U.S. Treasury securities*
Other securities*
Demanddeposits- total#
Demanddeposits- adjusted
Savingsdeposits- totalt
Time deposits - total#
Individuals, part. & corp.
(large negotiable CD's)
WeeklyAverages
of Daily Figures
Member Bank,Reserve
Position
Excess Reserves (+ )/Deficiency (-)
Borrowings
Net free reserves (+ )/Net borrowed( -)
* Excludes trading
Amount
Outstanding
6/8/83
163,116
141,453
44,303
56,161
23,679
2,919
8,215
13,448
41,107
29,420
67,573
64,387
58,100
18,222
Change
from
6/1/83
Change from
year ago
Dollar
Percent
76
31
23
46
21
278
133
27
-3,777
1,546
357
247
185
42
-
-
-
Weekended
Weekended
6/8/83
6/1/83
147
72
75
2,587
1,798
285
1,128
354
734
1,716
927
2,151
1,341
36,439
31,034
27,416
17,280
1.6
1.3
0.6
- 2.0
1.5
33.6
26.4
6.4
5.5
4.8
117.0
- 32.5
- 32.1
- 48.7
Comparable
year-ago period
104
110
6
,
95
199
104
account securities.
# Includes items not shown separately.
t Includes Money Market Deposit Accounts, Super-N OW accounts, and N OW accounts.
EditorialCOmments
maybeaddressed
to theeditor (GregoryTong)or to theauthor.•.. Freecopiesof
this and other FederalReservepublicationscanbe obtainedby callingor writing the PublicInformation Section,FederalReserveBankof SanFrancisco,P.O.Box7702,SanFrancisco'94120.
Phone
(415) 974·2246.
(QI.
@FedFRASER