Housing Starts

August 29, 2005
Dean Foust

I've cited from Merrill Lynch's housing research on several occasions recently, and that's because the folks there tend to regularly come up with a fresh take on what is a much-scrutinized topic. In a report this morning, North American chief economist David Rosenberg takes on the claim made by homebuilders -- who have been throwing up new housing at a rate of 2 million new units per year -- that demographics explain the sharp increase in new housing starts in recent years. To that, Rosenberg says bunk...

Rosenberg notes that total home sales in relation to the prime home-buying age cohort have doubled in the past decade, and is up 50% in just the past five years. And of course, in many hot markets, home prices have easily doubled over the past five years. But Rosenberg argues that home price growth sould be running no more than mid-single-digit growth based on affordability and demographic factors.

On the demographic front, Rosenberg notes that the demographics aren't favorable to housing, and certainly less favorable than was in the case in the 1970s. He notes that the growth rate in household formation among 35- to 44-year-olds have stagnated for four years now. The heyday for demographics was back in the mid-1970s and 1980s when annual household formation was between 3% and 6% growth. Now, total household formation is growing at less than 1% -- one of the slowest growth rates in the past four decades.

Rosenberg even takes on the claim by homdebuilders that the high divorce rate explains the greater need for housing -- since more divorces mean the same two people need two houses or condos, not one. "But even here we have bad news for you: the U.S. divorce rate (at 0.38%) actually peaked in 1979 and again in 1981 at 0.53% of total population and has been coming down since then."

So Rosenberg says there are only a limited number of other explanations to justify the yawning gap between home sales and starts and population growth: That we're tearing down or abandoning some 500,000 homes each year (which he thinks is improbable) or that foreign investors have stopped buying Treasuries and are buying U.S. homes (also unlikely) or that there's rampant speculation by investors who are buying a 2nd or 3rd home hoping to flip it at a profit to another buyer down the road. That's the explanation that Rosenberg appears to give the most credence to.