Pent Up Housing Demand

Population growth has not slowed, rising consistently by around 3 million each year, but household formation has.

Palm Coast, FL – July 14, 2011 – Demand for housing has been suppressed in the four-year period from 2007 to 2010.  A review of household formation shows an annual increase of 500,000 to 600,000 over these years.  A more normal gain would be 1 to 1.2 million each year.  (As a quick clarification on households, one household corresponds to one housing unit.  A single person living in an apartment is considered one household.  A family of five people living under one roof is also considered one household.)  Population growth has not slowed, rising consistently by around 3 million each year, but household formation has.

That is due to an increasing number of people deciding, or being forced by circumstance, to live with others.  Rather than one roommate, many now have two.  Some recent college graduates have returned home to live with their parents.  Painful foreclosures have also forced people to find temporary arrangements with friends and relatives.


Living in tight spaces is not sustainable.  More people cannot be comfortably shoved into existing households.  Aside from the desire to be independent and to move away from temporary living situations, there is the issue of “familiarity breeding contempt,” as the saying goes.  It is just a matter of time before household formation returns to its historic normal growth of 1 to 1.2 million each year.  There could even be more-than-normal household formation for a few years from both normal population growth and from people leaving temporary arrangements.  A stronger economy and job prospects will help in restoring normal household formation.

This suppressed housing demand is like a coiled spring.  But when will it pop?    This year?  Next?

When it does pop there will be a rush of home buyers and renters into the market.   Inventory will fall, home prices will rise.  Rents will rise.  Home builders will need to quickly ramp up production and hire construction workers.  Home builders are expected to add only 770,000 new units this year, which is well below the one million new demand from household formation, but still up from the 500,000 range of the past three years.

This concept is the basis for Warren Buffet’s optimistic outlook for housing in  last week’s interview.

Source: National Association of Realtors®

5 replies
  1. Dave
    Dave says:

    Just Possibly We Are Facing A New Paradigm

    If history is the best predictor of the future, then your suggestion of pent-up housing demand and its explosive upside potential for the future would be expected. However, what if this Country is experiencing a massive decline in its "standard of living" and is on the verge of collapse just like all previous Empires( Roman, British, Greek, Ottoman etc)?? Recent events indicate that we are going the way of those previous empires and the USA will fall just like each of them did, In that case, it would be decades before real estate and housing ever saw any significant appreciation and people would adjust their living standards and expectations of such. Humans are very adaptive creatures and even though we strive for growth and improvement, we first and foremost strive to survive!!!

  2. Alex
    Alex says:

    New reality?

    Perhaps the new reality will consider a house as a shelter and not as an investment vehicle.

    Stand alone houses are the least energy efficient form of housing and it may turn into a luxury and not a necessity.

    Toby, your energy consumption is reduced since you moved. Right?

  3. Rich
    Rich says:

    Dave is right

    Our rising debt and the President’s low priority on it and his obsession with spending will ultimately mean we either monetize the debt or follow Greece. The politicians still don’t get it despite the Tea Party. The debt will undermine our national security and result in a lower living standard which will be shown most dramatically in housing–fewer starts, more people per home, a disastrous second home market, and continued foreclosures putting more pressure on lower prices.

  4. ron davis
    ron davis says:

    more like europe

    the basic premise of the impact or current conditions on the future is starting to change….i would agree that the impact could lead to demand given the old behaviors of our country, but the future is going to be different..more like other cultures..europe, asia, etc…..we just are not going to be able to consume all the worlds resources like we used too….

Leave a Reply

Want to join the discussion?
Feel free to contribute!

Leave a Reply