Housing Will Weaken Further In 2019 And 2020

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Strong home price appreciation last year led many to wonder if housing was unsustainably strong. I thought not and in November 2018 wrote Housing Forecast: Not A Bubble In 2019. This update shows that housing will continue to soften, though not quite so much as previously expected.

The most important factor determining housing construction and pricing is the underlying demographics. Housing is mostly built to accommodate new residents; just a little new construction replaces demolished or abandoned housing. My first gauge of the housing market is construction relative to population growth. The accompanying chart shows how many housing units were started per 100 new residents. New residents come from births in excess of deaths, plus net foreign immigration. The population data include estimates of illegal immigration, though there’s obviously some uncertainty there.

Housing starts per 100 new residents

Housing starts per 100 new residents- DR. BILL CONERLY BASED ON DATA FROM U.S. CENSUS BUREAU

This ratio shows we are in the ballpark of building just the right amount of new housing, single family homes plus apartment units. This is a low-fidelity measure, ignoring factors such as mobile homes shipments, demolitions, and houses abandoned in rural counties as people migrate to cities. Nonetheless, it gets us in the ballpark of whether we are grossly overbuilding or underbuilding.

Key to this chart is the slow population growth of recent years. The United States population growth last year was the lowest percentage increase since 1937. Many people in the lumber business think of 1.5 million housing starts as normal, but that was back when population growth was much faster. Today, 1.1 million is a normal year, and we built 1.2 million housing units in 2018, though with a downward trend in the second half.

U.S. Population Growth

U.S. Population GrowthDR. BILL CONERY BASED ON DATA FROM U.S. CENSUS BUREAU

The other benchmarks for current conditions that I watch are housing vacancy rates. They are running about normal for both owned (owner-occupied if not vacant) and rental properties. The quarterly data from the Census Bureau don’t align perfectly with other data sources, but they do indicate gross disparities from normal.

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