Thursday, July 28, 2011

Housing Starts: Impact of Changes in Household Size

by Bill McBride on 7/28/2011 06:26:00 PM

I've seen several people compare total housing starts with previous decades and ask: "Why is there still excess supply?"

Below is the long term graph of both total housing starts and single unit starts. If we look at the graph, we notice that there were more starts at the peak in the '70s than during the recent housing bubble.

Obviously there were many more multi-unit housing starts in the '70s - and that is a clue.

Total Housing Starts and Single Family Housing StartsClick on graph for larger image in new window.

The key to the number of housing starts is household formation.

Household formation is a function of changes in population, and also of changes in household size. During the '70s, the baby boomers started moving out of their parents' homes, and there was a dramatic decrease in the number of persons per household. And that led to a huge demand for apartments (the surge in total starts).

The table below shows the number of persons per household for every decade from 1950 through 2010 (based on the decennial census data). Also using the decennial census data we can calculate the number of households needed because of 1) population growth, and 2) changes in household size:

Decennial Census, Population and Households in Millions
CensusPopulationHouseholdsPersons per householdIncrease in Households over decadeIncrease in Households due to Population GrowthIncrease in Households due to change in Household Size
1950150.742.83.52 --- --- ---
1960179.353.03.3810.28.12.1
1970203.263.43.2110.47.13.3
1980226.580.42.8217.07.39.7
1990248.791.92.7111.57.93.6
2000281.4105.52.6713.612.11.5
2010308.7116.72.6511.210.21.0


Because of the changes in household size, the U.S. needed far more additional housing units in the '70s than in the '00s. In the decade ending in 1980, there were 17 million households added. A majority of those households were added because of the decrease in the number of persons per household (boomers moving out!).

Unfortunately it is difficult to estimate the number of housing units needed in a given time period, even if we know the number of new households being formed (and we don't have timely data on household formation!). We also have to account for scrappage (demolitions), mobile homes and second homes. And this assume no excess supply - and right now there is a significant excess supply.

A simple formula would be:

Housing Starts + mobile homes needed = Households formed + scrappage + second homes added.

So if 1 million households are formed in a year, 200 thousand homes demolished (probably close), and say 100 thousand 2nd homes added, then the total housing starts plus mobile homes added would be 1.3 million.

Note: this doesn't account for location (most homes are not transportable), and the desires of each household (a mobile home isn't a substitute for a 4,000 square foot home).

So we can't just compare housing starts in different decades without looking at household formation. I'll have more on this ...

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