Yes, you read that right. Get ready for the next housing boom. You're probably thinking, “How can that be?” With all the mortgage delinquencies and foreclosures, and record levels of housing inventory, how could we possibly have another housing boom?
It's not going to happen soon. In fact, it may not happen for several more years. Yet despite all the problems we are seeing today, pent-up demand will create the next housing boom. This is because demand for housing is closely tied to the rate of household formation. As society creates more households, society needs more houses. Right now, due to the poor economy and the dismal jobs market, household formation is on hold. This is one reason why the housing market continues to remain depressed.
A household is simply a residential unit. It refers to a person or persons living under one roof. Traditionally, a household has been thought of as a nuclear family. Boy meets girl, boy marries girls, boy and girl buy a house or rent an apartment. In this way, marriage creates more households and demand for more places to live. Divorce, too, creates more households and demand for more housing. People who get divorced don’t want to continue living together under the same roof. Households are also formed with children grow up and move out. Most kids can’t wait to get their own place.
Much of this activity is currently on hold. In a recent interview on National Public Radio, Karl Case (one half of the famous S&P/Case-Shiller duo) recently said, “The process of generating new households seems to have stopped.” Due to the poor economy, some people are postponing marriage. Others are postponing divorce. And as much as they would like to be independent, many grown children are staying put. Some can't find jobs even after graduating from college, so they are choosing to live with mom and dad just a little longer. Even those lucky enough to be employed are moving in with their parents to cut expenses.
Believe it or not, this lack of household formation could be good news for housing in the long run. It means there is a lot of pent up demand for housing, and chances are it is growing. Current household formation may be depressed, yet potential household demand is strong. Once the economy begins to pick up steam and more people start to find jobs, household formation will surge. Once that happens, demand for houses and apartments will also surge.
This is not to say that any of this is imminent. More likely than not, the process could take a few more years. Yet unless you believe the United States is on a permanent trajectory toward economic decline, you have to believe that the housing market will eventually turn around. All that pent-up demand for household formation should create a strong rebound in the demand for housing. Maybe this time if we are smart enough to keep our wits about us, we will avoid another housing bubble.
