Pent-Up Demand Is Boosting Home Sales, But Can It Last?

Aug 15, 2013
Originally published on August 15, 2013 1:33 pm

Six years ago, the U.S. housing market plunged off a cliff. Now prices are bouncing back up — sharply in many markets.

That has some real estate analysts saying 2013 may mark the turning point — when pent-up demand will revive the housing sector and boost the broader economy.

The optimists say millions of Americans have been living with relatives or renting for years now, trying to ride out the Great Recession and the slow recovery. At this point, many are ready to buy homes of their own.

If that theory turns out to be right, the home-sales boom could lead to new jobs in construction, landscaping, drapery hanging, furniture making, lending and much more.

A Housing Resurgence?

The reasons for optimism are compelling:

-- Census data show that the number of such multigenerational households of adults rose from 46.5 million in 2007 to 51.4 million by the end of 2009 — a 10.5 percent jump over just three years. That means millions of young adults are still living with their parents, and may be eager to move out.

-- Rents are high. RealFacts LLC said that its most recent survey shows that out of 41 markets, rents were up in 39 and remained flat in two.

-- Even as rents rise, homes remain affordable in most markets because prices are well below peak levels and interest rates remain low by historic standards.

-- Overall household debt has declined to the lowest level since 2006, according to a new study by the Federal Reserve Bank of New York. That means more people are in better financial shape to buy a house.

In light of all those factors, "there's pretty clearly a lot of pent-up demand," said Andrew Paciorek, an economist with the Federal Reserve Board in Washington.

His research shows that between 2006 and 2011, the number of Americans forming new households was less than half what it would have been under normal economic conditions. That rate of household formation represented "the lowest five-year period on record — at least back to the 1950s or so," he said.

His economic model predicts that the housing market will continue to see a steady boost as Americans finally shake off the recession and get back to forming new households.

Why It May Not Happen

But skeptics question whether those factors can overcome the countervailing forces that may restrain the housing market. Their arguments are compelling too:

-- Many of the young adults who might want homes are carrying tens of thousands of dollars in student debt. Household debt is down for the broad spectrum of Americans because so many homeowners have been paying off mortgages and home-equity loans. But among younger adults, college loans are a bigger burden than ever.

-- Once the recession began, birthrates started to drop. That means more people are remaining childless or having just one baby, reducing the need for families to move into larger homes.

-- The job market remains tough, and raises have been meager. With the unemployment rates still at 7.4 percent, many people remain reluctant to buy a house.

-- Attitudes may be changing about homeownership. Some surveys suggest younger Americans are less interested in living in suburbs while many affluent baby boomers are moving out of the suburbs and into urban apartments and condos. But other studies still find strong interest in homeownership among Americans.

-- Creditworthiness standards remain high, while millions of Americans have poor ratings, thanks to bankruptcy and foreclosure filings over the past few years.

John Makin, an economist with the American Enterprise Institute, says no matter how much people may want to buy houses, they can't have what they can't afford. And today's economy, with its weak wage growth, may not be strong enough to allow the housing market to enjoy a sustained surge.

And even if housing does keep rebounding, Makin says he doesn't think it will provide enough of a boost to push the broader economy out of the slow-growth doldrums.

"Everybody wants to get back to normal," Makin said. "They'd like to be buying a bigger and better house." But while there may be plenty of theoretical demand for homes and other big-ticket items, "the effective demand — the income — isn't there," he said.

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The housing market this summer is one of the bright spots in the U.S. economy. The latest data shows that prices nationally are up more than 10 percent from a year ago. In some markets, it's a lot more than that. The pace of sales is rising, too, so Americans are out there bidding on houses again. But is there enough demand to keep the recovery going? That's the question NPR's Chris Arnold tackles.

CHRIS ARNOLD, BYLINE: Christine Carlson is showing me around the condo that she lives in with her boyfriend in Chelsea, across the Mystic River from Boston.

CHRISTINE CARLSON: Chelsea's a cool little town. They're doing a lot of movies here. Denzel Washington just filmed here for his next movie.

ARNOLD: But there's nothing very Hollywood or glamorous about Carlson's condo. For her, it was kind of a barebones, starter place. It's in a small building with old aluminum siding. So last year, she tried to sell it and buy a nicer condo. But her realtor Anita Shishmanian says that that didn't go very well.

ANITA SHISHMANIAN: So we put it on the market, and then it just languished on the market.

ARNOLD: So there's been pressure building up in the housing market. Christine Carlson wanted to sell her condo and buy something better, but a year ago, she couldn't get what she paid for it. So she couldn't sell, and she was stuck.

SHISHMANIAN: Right. She was stuck.

ARNOLD: So imagine now, across the country, there are millions of people like Carlson who want to buy or want to sell and who can't, and so there's been this pent-up frustration or pent-up energy in the economy waiting to get released. And now, that is finally starting to happen. This summer, Carlson and her realtor decided to try to put her house back on the market.

SHISHMANIAN: We did one open house, and had multiple offers right off the bat. People seemed to really like it, and it was priced right. Actually, we probably could've priced it higher.



ARNOLD: But with the stronger housing market, somebody bought Carlson's condo. And since then, she's gone out and bought a nicer place herself. So there's kind of a chain reaction there. As more people buy homes, that pushes prices up. And as prices go up, that allows more people to sell who used to be stuck, and then they can go buy homes.

But, OK, just how much of this pent-up demand is there?

ANDREW PACIOREK: There's pretty clearly a lot of pent-up demand.

ARNOLD: Andrew Paciorek is an economist with the Federal Reserve Board in Washington. He recently finished a research paper looking at the number of young people moving out of their parents' houses or newlyweds living with relatives who were going out and buying or renting their own places to live. That's called household formation, and it dropped very sharply after the recession hit.

PACIOREK: It's quite unusual. So, you know, the long run trend is probably about one-and-a-quarter million households forming per year, on net.

ARNOLD: But from 2006 through 2011, there were less than half that normal number of new households forming.

PACIOREK: If you go back over history, that's pretty clearly the lowest five-year period on record, at least back to the 1950s or so.

ARNOLD: Really? So, I mean, we're talking about 60-plus years we've never seen so few households forming in America.

PACIOREK: Yeah. That's exactly right.

ARNOLD: So now, those people living in their parents' basements, more of them are starting to move out, and household formation is on the rise again. Paciorek stresses that predicting the future is tricky, but his economic model predicts that the housing market will continue to see a steady boost as people form new households. That would likely mean more homebuilding jobs and all kinds of other jobs.

And all that would be good, but...

JOHN MAKIN: There's pent-up demand, but the question is: Is there pent-up effective demand?

ARNOLD: That's John Makin, an economist with the American Enterprise Institute. He says the bottom line is that people just don't have that much money to spend. Wage growth is weak. If you don't have a great credit score, it's hard to get a home loan. The unemployment rate is still falling very slowly.

MAKIN: I mean, look, everybody wants to get back to normal, and everybody would like to go out to dinner as much as they used to. And they'd like to, you know, be buying a bigger and better house, and all that stuff. And so there's certainly plenty of frustration. But the effective demand is that the income isn't there.

ARNOLD: In fact, when it comes to the overall economy, Makin is getting worried that the weak economic recovery could lose momentum. He thinks that unless Congress takes more action - say, through tax cuts and stimulus spending - the economy, he thinks, could slide back into real trouble. That's more pessimistic than most economists who think the economy is going to keep moving forward, even if slowly. But at least when it comes to housing, everybody agrees that it's nice to finally be getting a boost. Chris Arnold, NPR News, Boston. Transcript provided by NPR, Copyright NPR.