Sound reasoning behind why housing prices will go up over the next few years.

Recently I received and email talking about the fact that there is light at the end of the housing tunnel. I thought I would pass it on.

Referring to the Certified Mortgage Planning Institute newsletter, our Chairman Gibran Nichols discussed sound reasoning behind why he feels housing prices will go up over the next few years. Mr. Nichols rationality is based on the following:

Reason #1 – Increase in Population = Increase in Demand

The population of the United States has grown by and average of 1.27% every single year since 1900. At current population levels, this means that we are adding about 3 million people to our population every year. As our population grows, we have about 1.3 – 1.5 million new households that are formed each year. These can include people who graduate from college and enter the work force, and adults who are currently living with their parents that decide to move out on their own.

Over the last 30 years, the average growth in new house holds has been about 1.4 million each year. Of course, these people will need a place to live. In fact, the National Association of Realtors estimates that up to 40% of all home buyers in today’s market are purchasing their first home – a perfect indication that this segment of the market place will continue to thrive even in the midst of an economic downturn.

The growth in population isn’t the only thing that will increase demand for new housing. In fact, approximately 300,000 housing units are demolished each year. This is primarily due to functional obsolescence because buildings become old and outdated. This means that the demand for new housing is about 1.7 million new units each year in order to replace the demolished homes and house the households that are formed.

The second side of the coin is supply.

Reason #2 – Less Building = Decrease in Supply

Everyone is aware that home builders are clearly struggling in this economy. In fact, the number of new housing units being built went from a peak of 2.1 million units in 2005 to less than one million units in 2008. New housing starts for 2009 are also scheduled to come in below one million as the market continues to work off the excess supply of housing that was built during the last few years. Here’s an interesting break down of new housing starts since the year 2000:

Year 2000 = 1.6 million new units
2001 = 1.7 million new units
2002 = 1.7 million new units
2003 = 1.9 million new units
2004 = 2.0 million new units
2005 = 2.1 million new units
2006 = 1.8 million new units
2007 = 1.3 million new units
2008 = less than one million new units
2009 forecast = less than one million new units

As you can see, from 2000-2002, the supply of new housing and units each year was just about right in order to meet the demand of 1.7 million as outlined above. However, things started to get a bit out of whack with some oversupply in the market between 2003-2006. Home values have been in decline from 2007-2009 as the market has been working off the oversupply.

However, sometime during the next 12-24 months, the oversupply of housing units will be completely absorbed due to the demand issues that were outlined above. In fact, if the trend continues, there could even be a housing shortage at some point in the next two years unless home builders start building new units at a much quicker pace. The math follows as:

Annual demand for new housing units: approximately 1.7 million new units

Annual supply of new housing units: less than one million

Bottom line: Demand will become greater than the supply at some point in the near future, and when that happens, the housing prices will stop falling and begin to appreciate at levels closer to historic averages (i.e. 2-4%).

This newsletter article was written on a national perspective and Mr. Nichols reminded the reader that there is no such thing as a “national housing market” as all real estate markets are local. States like Michigan that are losing population will take longer to see house prices recover and go up; while states like Texas that are growing will recover quicker. Our golden state has been holding steady with population so we should feel the effects of simple supply and demand as mentioned in this article at a normal pace.

Feel free to pass along and as always call anytime.