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BusinessWeek: Another Reason For Those Empty Houses
Saturday, 04 August 2007


Another Reason For Those Empty Houses

Misreading demographic trends led builders to get ahead of demand

During the boom, homebuilders justified their construction frenzy in part by saying they were simply meeting fast-rising demand, particularly from young married couples, the newly divorced, recent immigrants, and others who needed places of their own. Indeed, in the year ending in June, 2006, Americans formed 1.6 million new households, with a household defined by the U.S. Census Bureau as a group of people living together in a house or an apartment.

But the nesting spree was not sustainable. A July 27 Census report shows a 44% drop in the number of new households formed in the year ended in June, 2007, to only 891,000. That's below the five-year trend of 1.1 million to 1.2 million new households per year. The sudden plunge in household growth helps explain why players ranging from builders and subprime buyers to banks and hedge funds are in such trouble these days—and why the weak housing market could last for years.

True, the fall in household formation isn't the only reason housing turned soft. In the short run, the link between demographic shifts and demand for houses can be affected by all kinds of factors, including interest rates, overall economic conditions, and how many people are buying extra homes for speculation.

In the long run, though, demand for housing tracks pretty closely with trends in marriages, births, immigration, and income growth. It appears now that builders misread the evidence and built at a pace above the long-term demographic trend. "The influx of investors and speculators was much, much bigger than anybody appreciated at the time," says David Seiders, chief economist for the National Association of Home Builders.

Read More...
http://www.businessweek.com/magazine/content/07_33/b4046608.htm

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