Demographics Determine Destiny - At Least for Real Estate Prices

One of the most basic law of economics is "supply and demand." If there is more demand than supply, prices will rise. If there is more supply than demand, prices will fall.

The main driver of demand for real estate has historically been population growth and more specifically household formation. More new households menans more demand for new homes and rental houses.

This is a good article about how household formation (demand) has been restricted by the current recession, but so has new home-building (supply.) When the econoomy turns around, there will be a pent-up demand for new and rental homes and the building industry will probably be slow to respond, leading to price appreciation in some markets. Of course, we would need to factor in job growth and financing availability to complete the picture.

Is a housing
shortage coming?
By Les Christie, staff writer
June 15, 2010: 2:08 PM ET
NEW YORK (CNNMoney.com) --

As the nation struggles to shrug off the worst
housing crash since the Great Depression, it
may be hard to believe a housing shortage
could be on its way.

The nation is simply not building enough
homes to keep up with potential demand.
Just 672,000 new homes were started in
April, an annualized rate and less than half
the long-term run rate needed to meet the
nation's natural population growth.

"It is ironic, but there is a growing
consensus that there may be a new housing
shortage coming," said James Gaines, a real
estate economist with Texas A&M.

So far, the shortfall has been masked by a
weak economy that has put a damper on
home buying. Once the job market
rebounds, however, people will look to have
their own homes again. This pent-up
demand could get unleashed on unprepared
markets, causing shortages and rising local
prices.

Household formation -- the technical term
for people moving in together -- has been
on hold during the past few years as young
people, especially, have been unable to find
jobs. In the past, an average of more than
1.3 million households were formed each
year, causing demand for 1.5 million new
homes. (More homes than households are
needed to replace those destroyed by fires,
floods, teardowns and neglect.)

In 2009, only 398,000 new households were
formed, according to the Census Bureau.
That is much lower than average and a
quarter of the number formed just two years
earlier.

"The decline in household formation is
artificial," said Gaines. "The young are
moving in with their parents. There's even
doubling up among working class people.
There's a pent-up demand coming if and
when the economy recovers."

Those doubting a new bubble is near point
to a large inventory overhang. As many as 7
million homes are vacant but not for sale,
according to the Census Bureau, which
should provide cushion to offset increased
demand.

"The housing market hasn't been this way
before," said Nicolas Retsinas, director of
Harvard's Joint Center for Housing Studies.
"The gravity of the problem is deeper and
the challenges different. You have to get
through that inventory."

The inventory number, however, can be
deceiving for two reasons: People may not
want to live in hard-hit areas where the
houses are (think: California exurbs and
Detroit neighborhoods) or the homes may
be beyond repair.
"Many of these vacant homes may not be
habitable or are in locations where nobody
wants to live," Gaines said.

Ordinarily, the nation's homebuilders can
react quickly to meet surges in demand. But
several factors are preventing them from
being nimble. The biggest is the difficulty
getting loans, according to Jerry Howard,
CEO of the National Association of Home
Builders (NAHB).
"When we came out of past recessions, there
wasn't the difficulty of obtaining financing
that there is now," he said.

Many small builders have been unable to
obtain construction loans or lost their
financing in mid-project. That has prodded
NAHB to support federal legislation that
would make $15 billion in lending
guarantees available for private builders.

Hard times also persuaded builders to
postpone purchases of land they could prep
for future development. It will take them that
much longer to gear up production once the
housing market improves.

Too, many builders went out of business in
the bust, so there will be fewer companies
out there to do the building. The survivors
will confront a transformed regulatory
environment, according to Howard, that will
make new homes harder to build and more
expensive.

"There is an increased focus on smart
growth that will create regulatory barriers to
the kind of sprawling development that has
characterized a lot of recent building," said
Retsinas.

The regulations come under two categories,
according to Susan Asmus, NAHB's senior
vice president for advocacy, covering where
new homes are built and how they're built.

One category is storm water runoff. The
Environmental Protection Agency tightened
requirement governing how builders handle
that. Builders will have to install controls
such as catchments or retaining ponds that
slow the flow of storm runoff into the local
watersheds.

"It could add as much as $15,000 to $30,000
an acre in extra costs, depending on the
soil," said Asmus.

Another proposed regulation mandates
sprinkler systems in each new home. This is
already state law, starting January 2011, in
California, Maryland and New Jersey. That
adds as much as $10,000 to the cost of
construction.

Previous overbuilding one-time boom
towns, such as Las Vegas and Miami, should
provide enough inventory of like-new homes
to counter any strong pent-up demand that
breaks free.

It's the more constrained markets, where it's
particularly hard to build -- such as New
York, San Francisco and Seattle -- that will
field the bulk of the new bubble problems,
according to Retsinas. He, however, is less
worried about the purchase market than
about rentals, the usual entree for the young
buyers expected to lead the new housing
market charge.

"Nobody is building any rental inventory,"
said Retsinas.