Demographics, Development, and Demand: Is Housing Headed for Another Bust or Robust Times?

By James D. Howsley
james.howsley@millernash.com

At least twice a day over the past six months, various clients, consultants, friends, and even family members have asked me for a prediction about the real estate development market. Every time it is asked, I hear this Shakespeare quote over and over in my head: “The fool doth think he is wise, but the wise man knows himself to be a fool.” So I don’t make gut-level prognostications because without some sort of evidentiary support, that kind of rambling should remain the province of cable-news networks. But for those willing to look at good demographic information, historical trends, and current inventory levels, a window into possible recovery scenarios for housing in the nation and the Northwest emerges.

...the data above suggests that if the industry does not see an increase in production in the total number of units, whether single-family or multifamily, we will be headed for a supply shortage in the next couple of years. My strongest fear is that by sitting on the sidelines until banks loosen up lending, we might be headed for a whipsaw in the real estate market and cascade right back into frenzied times when the supply cannot meet the demand...

Let’s start with a quick history lesson. From 1978 until the end of 2007, the annual housing starts nationwide (single-family and multifamily units) averaged about 1,544,000 annually. In 2008, housing starts dropped below a million to about 906,000. And in 2009, that number slid even further, to just about 550,000. But when you factor in the robust years of 2003 to the end of 2007, housing production rose above the historical average to about 1.8 million units a year, a difference of about 256,000 units a year from the historical average. Multiplied out over the 2003-2007 cycle, this means that about 1,280,000 more units were produced than the historical average. But if we factored in the 2008 and 2009 numbers against the historical average, the number of units produced would seemingly correct the overproduction during the robust cycle of 2003-2007. That would seem to indicate that we are already in the trough of unbuilt demand and that in 2010 we should see an increase in housing demand, with returns to historical averages sometime later this year. But housing starts are still fumbling about, especially in some markets. What could cause this discrepancy?

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