Wednesday, February 03, 2010

Housing Stock and Flow

by Bill McBride on 2/03/2010 03:20:00 PM

Yesterday I posted some data from the Census Bureau that suggests there are about 1.8 million excess vacant housing units in the U.S. (above the normal levels).

IMPORTANT: The housing stock includes both owner occupied and rental units. I suspect many of the excess units absorbed will be by renters.

This raises a key question for the economy and jobs: How much longer until these excess housing units will be absorbed?

The answer depends on 1) how many net units are added to the housing stock, and 2) how many net households are formed. The table below shows about 650 thousand net housing units added to the stock in 2009.

Housing units include single family homes (included as 1 to 4 units), apartments (5+ units), and mobile homes. Demolitions are subtracted from the stock (note: demolitions are the hardest to estimate).

In 2009, because of the recession, fewer than normal net households were formed (probably around 650 thousand), so the excess inventory was not reduced.

NOTE: Table is based on Completions. Housing units added to stock:

200920101
1 to 4 units535.4500
5+ units260125
Mobile Homes25360
Sub-Total848.4755.0
Demolitions3200200
Total648.4485.0

1 Preliminary estimates for 2010.
2 Actual rate through November, December estimated.
3 estimated.

Notice for 2010 that the estimate is for 5+ unit completions to collapse. This is already in the works as shown in the following diagram:

Multifamily Starts and completions Click on graph for larger image in new window.

The blue line is for multifamily starts and the red line is for multifamily completions. For the most part, all the multifamily units that will be delivered in 2010 have already been started since, according to the Census Bureau, it takes on average over 1 year to complete these projects.

Since multifamily starts collapsed in 2009, completions will collapse in 2010.

Similar logic applies to single family units, although these only take around 7 months to complete. Since there have been an average (SAAR) of 485 thousand units started over the last 6 months, completions will probably average under 500 thousand in the first half of the year. I was generous and added a little pickup later in the year, but it could easily be less. The D.R. Horton CEO said yesterday:
We expect our September quarter will be the most challenging as the tax credit for home sales will have expired. As we move past the selling season, we'll be able to get a better read on core demand and we'll adjust our business accordingly.
The manufactured homes data is from the Census Bureau (and demolitions are estimated).

The good news is the population is growing at around 2.6 million people per year. And based on normal household formation to population ratios, this would usually mean 1.1 million or more net new households formed in 2010. Unfortunately job growth will probably be weak in 2010 and hold down household formation, but this suggests the number of excess units should finally start declining in 2010 - perhaps by more than 600 thousand units, perhaps even cut in half. (note: this doesn't include 2nd home buying that might also reduce the number of excess units).

Those expecting a sharp increase in residential construction this year will probably be disappointed since there are still a large number of excess vacant housng units - and, as I've noted many times, residential investment is usually one of the engines of recovery (both for GDP and jobs) - so I expect those looking for a "V-shaped" recovery will be disappointed too.

We are still a long way from significant job growth in residential construction, but we might actually see progress in reducing the excess inventory this year.

Special thanks to housing economist Tom Lawler who shared with me some of his thoughts on completions.