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June 24,1983

Record Housing Boom in the 1980s?

The National Association of Homebuilders cade of the 1980s compared with 17.2 mil­ recently reaffirmed its forecast of 1.56 lion in the 19705. The latter provided the million housing starts in 1983 and a 1.76 support for 18 million housing starts in the million level in 1984. In making the latter 1970s. The critical question for the 1980s is prediction, the Association noted that anal­ whether the demographics will continue to ysts and builders are starting to worry about be as favorable to housing. An inspection interest rate levels and the sustainability of of projected changes in the population and the recovery. The homebuilders earlier had household formation of people in the home­ predicted a record level of housing con­ buying age groups in the 1980s suggeststhat struction in the 1980s, based upon the chil­ the number of housing starts in this decade dren born in the 1950s and 1960s reaching will not surpass the record number of the the ages in which they will form households 1970s. and add to the demand for housing, but they now believe this prediction is toooptimistic. Dubious demographics While recent news about the housing mar­ The homebuying age groups generally are ket has been encouraging to the housing con'sidered to be the population in the industry, a more careful look at the under­ 20-24,25-34, and 35-44 age brackets. The lying demographics suggeststhat reduced 25-34 group is thought to be the principal expectations are in order. one, representing the bulk of first-time homebuyers. The 35-44 year old group con­ Recent and future activity tains many established homeowners whose In 1982, the sales of new homes (at about demand for new housing represents a desire 412,000 units) were at their lowest level to upgrade existing shelter. In both cases, since the 1960s and housing starts (1.1 the actllal demand for housing (including million units) were at their lowest level since rentals) is determined by the number of 1946., The situation, however, has changed households formed in each group, rather thus far in 1983. Through May, housing than the number of individuals in the starts were running about 50 percent above groups, as several individuals may share one the depressed 1982 level, and home sales housing unit. followed not much farther behind. The renewed housing activity was aided by a One way in which we can judge whether substantial increase in the availability of assumptions about household formation are construction and mortgage financing and reasonable is to compare the projected a significant decline in the cost of that increase in households to the projected financing. increase in population in the homebuying (and renting) age groups. A high ratio Whether the recent activity portends a of increase in households to increase in record housing boom in the 1980s is a dif­ population implies a high rate of household ferent question. To a considerable extent, formation. such predictions have been based upon Census Bureau projections of household We know that the record number of housing formations (SeriesB), which are themselves starts in the 1970s was due primarily to the based upon extrapolations of the trends in rapid rate of household formation in that marital and household status that occurred decade. The number of households formed between 1964 and 1978. (17 million) between 1 970and 1980 The projections indicate about 15.9 million equalled 63 percent of the 27 million popu­ new households will be formed in the de- lation increase in the 20-and-over age 1 Opinions exprE.:ssed in this nevvsleHpr do not necessarily reflect the vie\vs of thp rnanagelnent ()f tht;:.,Federal Reserve Bank of Francisco', or of the Board of Coverrlors of thf' Federal Reserve Svslem. groups. Current Census projections for the (house prices, financing costs, and mainte­ decade of the 1980s assume an even higher nance costs) and household incomes. Since rate of household formation. They predict an 1 980, and in spite of the recession, average increaseof23.7 million people 20-and-over new home prices have increased by an addi­ in age (3.3 million less than in the 1970s), tional 15 percent to $87,900 in 1 983's lirst but household formations of about 16 mil­ quarter. The increases about match the gain lion or about 66 percent of that population in average household income, but the costs increase. of maintenance (due partly to soaring heat­ ing costs) have increased about 20 percent. The projections assume an especially high rate of household formation for principal Moreover, the gains in average household homebuyers. Chart 1 (Census "middle income apparently have not been shared by series" projections) shows that the popula­ potential householders in the crucial under­ tion of the 20-24 age group is expected to 34 age group, which nonetheless has been decline by 3 million and that the population projected to account for about 30 percent of the 25-34 age group is expected to in­ of all new household formations during the crease by 6 million. Together, the two 1 980s. Even assuming that one can fing an groups will experience a net increase of 3 "average" new home for $87,900 some­ million, but the number of new households where in the U.s., hlonthlymortgage pay­ formed by these two age groups is projected ments at today's average lending rate of at4.6 million (Chart 2). New households are about 13 percent approximate 38 percent of thus projected to equal 153 percent of the average household income. This percentage population increase in those two age is almost double that in the early groups; the corresponding percentage in when mortgage rates averaged 8 percent the 1970s was only 51 percent. and new single family home prices, $30,500 (1 972). The prospective huge federal For the group 35-44 years old, the Census demands on the credit markets due to fed­ predicts a population increase of 1 2.2 eral deficits also raise doubts as to whether million and household formations of 6.4 mortgage rateswill fall significantly in the million or 52 percent of the population nearfuture. increase. The corresponding figures for the 1970s were a 2.5 million population-in­ Of course, housing prices are not deter­ crease and an almost matching household mined independently. If the "affordability increase of 2.4 million. constraint" becomes too binding, housing Income and price constraints prices will fall (or increase less slowly) to There are several reasons for believing that reflect the reduced effective demand. Along the rate of household formation wi II be the way, however, theywill discourage high lower than the current Census estimate for rates of household formation. the 1 980s. (In fact, the tensus will be revis­ ing its projections in the months ahead to A second factor holding down household take account of developments since 1 978.) formation in the 1980s also involves the net In the 1 970s, the rapid increase in house­ cost of homebuying. It is widely believed hold formations (in comparison to net popu­ that a significant part of the increased demand for housing in the 1970s was of a lation changes) reflected a number of social and economic factors that may not be "speculative" nature. That is, households present or may not operate to the same reacted to the environment of rapid inflation degree in this decade. and preferential tax treatments for home­ ownership by buying homes for their ex­ One such factor is the vastly increased dis­ pected capital gains. With lower inflation parity between the costs of owning a home contributing to more stable house prices in

2 the 1 980s (although they still seem likely to effective housing demand, while public increase faster than household incomes), policy in the area of housing subsidy pro­ prospective homebuyers presumably will grams may work in the opposite direction, have less incentive to buy houses for specu­ since such programs as the multi-billion lation and will be more likely to view them dollar Section 8 rental subsidy program will once again as a source of shelter. be phased out.

A third factor is sociological. The number of At the same time, a relatively high level of households formed by other than married starts may be associated with demographic couples rose by 12 million (70 percent) in shifts to growth areas such as the South and the 1970s and accounted for 76 percent of West where vacancy rates are already low, all household formations. A sharp rise in the but a mitigating circumstance is simply that number of single and divorced or separated no one, native born or in-migrant, has ever women increased the demographic demand brought land with him. Home prices (and for housing, but it is unlikely that this phe­ rentals) in growth areas such as California nomenon will be repeated in the 1 980s. A should therefore reflect this relative similar phenomenon was the continued rise constraint and remain higher than the na­ during the 1970s in the number of married tional average, thus discouraging some of women in the labor force; they augmented that demand. ' effective housing demand-adding upward pressure to home prices-by providing Conclusion a second income to accommodate rapidly Forecasts of a record housing boom in rising home prices. But, since female labor the 19S0s may be overly optimistic. They force participation rates are now very high are based upon extrapolations of trends in by past standards, it is unlikely that this force household formation from the mid-1 960s to will operate in the 1 980s to the same extent the late 1 970s that may not be as strong in it did in the 1970s. the 1980s. Some of the heavy demands of the 1970s was a response to socioeconomic Other factors forces that are unlikely to be repeated, or There are, of course, other elements in the at least are unlikely to operate to the housing equation that will help determine same extent. Moreover, continued heavy the rate of new construction. These include demand for housing wi lito some extent tend the rate of removal of existing structures to be self-limiting, as constraints on afford­ from the housing stock and conversions. ability and availability discourage house­ "Creative financing" techniques such as hold formation. equity participations may serve to increase Verle B. Johnston Chart 1 CHANGEIN POPULATION Millions 12 Chart 2 10 CHANGE IN HOUSEHOLD FORMATIONS Millions 8 8

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BANKING DATA-TWELFTHFEDERAL RESERVE DISTRICT (Dollar amountsin millions) SelectedAssets and liabilities Amount Change Change from large CommercialBanks Outstanding from year ago 6/8/83 6/1/83 Dollar Percent loans (gross}adjusted) and investments'" 163,116 76 2,587 1.6 loans (gross,adjusted) - total# 141,453 - 31 1,798 1.3 Commercialand industrial 44,303 23 285 0.6 Realestate 56,161 - 46 - 1,128 - 2.0 loans to individuals 23,679 21 354 1.5 Securities loans 2,919 278 734 33.6 U.S. Treasury securities* 8,215 133 1,716 26.4 Other securities* 13,448 - 27 - 927 - 6.4 Demanddeposits - total# 41,107 -3,777 2,151 5.5 Demanddeposits - adjusted 29,420 1,546 1,341 4.8 Savingsdeposits - totalt 67,573 357 36,439 117.0 Time deposits - total# 64,387 247 - 31,034 - 32.5 Individuals, part. & corp. 58,100 185 - 27,416 - 32.1 (large negotiable CD's) 18,222 - 42 - 17,280 - 48.7 Weekly Averages Weekended Weekended Comparable of Daily Figures 6/8/83 6/1/83 year-ago period Member Bank,Reserve Position Excess Reserves (+ )/Deficiency (-) 147 104 95 Borrowings 72 110 199 Net free reserves (+ )/Net borrowed( -) 75 6 , 104 * Excludes trading account securities. # Includes items not shown separately. t Includes Money Market Deposit Accounts, Super-N OW accounts, and N OW accounts. EditorialCOmments may beaddressedto theeditor (GregoryTong) or to the author .•.. Freecopies of this and other FederalReserve publications can be obtainedby calling or writing the Public Infor­ mation Section,Federal Reserve Bank of SanFrancisco, P.O. Box 7702,San Francisco'94120. Phone (415) 974·2246.