Monday, July 14, 2014

Following the housing problem

I previously covered the housing crunch facing big cities.  The problem is starting to become widespread.

The US is facing a new housing crisis. No, it has nothing to do with subprime mortgages or bloated home equity balances. This time the nation is dealing with shortages of rental housing, a problem that will become increasingly acute in years to come and may result in a material drag on economic growth.

Indeed we are already seeing it now.  Younger adults are buying homes infrequently.

Just 36% of Americans under the age of 35 own a home, according to the Census Bureau. That's down from 42% in 2007 and the lowest level since 1982, when the agency began tracking homeownership by age.

They are also living in their parents' home more frequently.

Due to high unemployment and sluggish wage growth, lots of young people who aren't in school don't have very much money in their pockets. And yet even though young people have less money today, rents are higher and mortgage lending standards are tighter. Higher costs plus lower incomes = growing need to economize, so more people are living with their parents.

We see younger adults with lower paying jobs and less savings, which is driving down demand for homes. Thus, supply is not increasing quickly; as reflected in depressed construction numbers.  New home prices won't fall below construction costs, so there is a price floor.  So the supply rises to meet a paltry demand.

If the problem were purely supply constrains we would see rapidly rising home prices.  And while that is true in some localities it isn't happening across the Midwest.  We are seeing rising home prices, but only in places truly constrained in increasing supply and facing rising demand like San Francisco and New York.  Other cities have rising demand and unconstrained supply, like Houston.  And while downtown Detroit and Chicago are seeing rising prices in some desirable neighborhoods, they aren't seeing the aggregate demand increases that Dallas is experiencing.  Indeed Dallas prices are at record highs, and Chicago is still off the peak.

For a city like Chicago, which is seeing rising rents despite low population growth, the question is would a resurgence of demand among younger Americans cause prices to skyrocket?  And if they did, would rising prices ignite a construction boom in a city with rather depressed new construction starts?

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