News articles about U.S. housing frequently posit a shortfall in the supply of new housing relative to demand. E.g., the lead
paragraph of a March 18 Wall Street
Journal (WSJ) article
reads, “America is facing a new housing crisis. A decade after an epic
construction binge, fewer homes are being built per household than at almost
any time in U.S. history.” But is that true; is the population-adjusted rate of
new home construction really near an historical low? After all, if new supply
is keeping pace with population growth, is there really a crisis?
To begin exploring this topic, we derived a metric -- called
“starts per person added” (SPPA) -- in which monthly not-seasonally adjusted
single- and multi-family starts are divided by the monthly change in the U.S.
population. As Figures 1 and 2 below indicate, the cyclicality of population
changes and construction activity within and among calendar years creates
considerable month-over-month and year-over-year variability in both the
single-family and multi-family metrics (Figure 3). Comparing long-term averages
(Table 1) against recent results – and especially 12-month moving averages (Figure
4), which reduce seasonality effects and make broader trends more apparent -- reveals
interesting patterns, however.
Figure 1. U.S.
population and population growth, by month, since 1960. Source: U.S. Dept. of
Commerce, Bureau of Economic Analysis (BEA). Click image for larger view.
Figure 2. Not-seasonally
adjusted monthly single- and multi-family housing starts since 1960. Source:
U.S. Census Bureau (CB). Click image for larger view.
Figure 3. Monthly
single- and multi-family housing starts per person added to the population,
since 1960. Sources: BEA, CB and Delphi Advisors. Click image for larger view.
For the entire period of January 1959 to May 2018 the
average single-family SPPA = 0.405 (Table 1); the pre-2000 average = 0.420 (i.e., 0.420 single-family start per person added to the population). Put another
way, prior to 2000, one single-family home was started for every 2.38 people
added to the population. We selected 2000:01 as a breakpoint because it is a
convenient middle ground among opinions
regarding when the housing “bubble” began. During 2000:01-2007:07, the period
encompassing the housing “bubble” and early part of the subsequent crash, the single-family
SPPA averaged 0.520 -- reflecting the overwhelming market preference for
single-family units.
Table 1. Average
monthly housing starts per person added to the population during selected time
intervals, by type of housing. Sources: BEA, CB and Delphi Advisors. Click
image for larger view.
The 1959:01-2018:05 average multi-family SPPA = 0.174; the
pre-2000 average = 0.198. I.e., pre-2000, one multi-family unit was started for
every 5.05 people added to the population. During 2000:01-2007:07 the
multi-family SPPA averaged 0.123, again confirming the preference for
single-family units.
As mentioned above, we calculated 12-month moving averages
of the monthly data to reduce seasonality effects and to make broader trends easier
to see (Figure 4). In the following discussion, we refer to the 12-month moving
averages of single-family SPPA as “SPPA1F” and “SPPAMF” for multi-family.
Figure 4. Twelve-month
moving average, or “MA(12),” of monthly single- (SPPA1F) and multi-family
(SPPAMF) housing starts per person added to the population, since 1960.
Sources: BEA, CB and Delphi Advisors. Click image for larger view.
Between 2000:01 and 2007:07, SPPA1F exceeded its pre-2000
average during 84 of those 91 months, peaked at 0.628 in November 2005, and
averaged 0.520. Although SPPA1F has been consistently rising from its October
2009 minimum of 0.162 (2009:10-present average = 0.277), it has yet to regain
the pre-2000 average. When adjusted for population growth, the single-family
housing bust (which helped spawn the Great Recession) and its aftermath was
deeper and, to date, has been over 50% longer than the preceding bubble.
The multi-family segment exhibits a different pattern. SPPAMF
rebounded off its October 2009 low of 0.021 (2009:10-present average = 0.127),
but has been gradually subsiding on trend since February 2017’s peak of 0.174.
Like its single-family counterpart, SPPAMF has yet to regain its pre-2000
average.
These two metrics would suggest, then, that housing supply
has indeed failed to keep pace with population growth. Moreover, unless
multi-family starts again trend higher, the gap could continue widening.
However, our findings do not confirm the WSJ’s
contention that starts are presently near an all-time low.
The above paragraph led us to wonder how many more/fewer
units have been built over time than might be justified by population growth.
Attempting to answer that question requires a review of Figure 1. Notice that
prior to 1990, monthly population growth was bouncing around in a range between
roughly 150,000 and 225,000. Beginning in 2Q1990, however, population growth
rocketed higher such that 225,000 became a “floor” rather than a “ceiling;”
moreover, that higher trend growth rate was sustained through the subsequent
decade. The Census Bureau observes “the
population growth of 32.7 million people between 1990 and 2000 represents the
largest census-to-census increase in American history,” but cautions “this
increase may be caused by changes in census coverage, as well as births,
deaths, and net immigration.” I.e., the jump may have been as much an artifact of
statistical methodology as genuine, organic growth.
The reason for making the above observation is that SPPA1F
and SPPAMF both tumbled below their respective long-term averages during the
1990s at least in part because estimates of population growth “reset” to a much
higher pace. To account for the population-growth “step function” in 1990 when estimating
what housing starts might be justified by population growth, we regrouped the
SPPA data into two new intervals: pre-1990 and 1990:01-present. The bottom two
rows of Table 1 present the relevant SPPA averages. If, for example, between
1959:01 and 1989:12 SPPA1F fell below 0.445 during a particular month, fewer
single-family houses were built than justified by population growth. The
“shortfall” in starts can be estimated by multiplying that month’s deviation
from 0.445 by the corresponding population growth for that month. For comparisons
starting in 1990, the average single-family SPPA was reset to 0.359 as a
reflection of the population-growth step function. December 2017 was chosen as
the ending point for estimating the SPPA averages since that date is now outside
the range of data subject to monthly Census Bureau revisions.
Monthly deviations were accumulated over time; both the
monthly and cumulative deviations for single-family starts are presented in
Figure 5. It is worth noting that, although monthly deviations have been both
positive and negative over time, the cumulative deviation remained negative
(bottoming at -2.142 million units in October 1971) until August 2003.
Consistent positive monthly deviations after February 1998 ultimately drove the
cumulative deviation to a peak 2.348 million units in December 2007. Negative
monthly deviations between 2008:01 and 2017:07 subsequently erased the
“excesses” of the housing bubble. Although the cumulative deviation line has
been turning upward since August 2017, it remains negative; as of May 2018, the
cumulative deviation stood at -384,000 units.
Figure 5. Monthly and
cumulative deviations of single-family housing starts relative to interval
averages. Sources: BEA, CB and Delphi Advisors. Click image for larger view.
Monthly deviations in the multi-family component have also
oscillated both positive and negative over time (Figure 6). Interestingly, the
cumulative deviation made it into positive territory during one 23-month period
(1974:01 to 1975:10) -- the result of a flood of multi-family construction
after 1967:01, perhaps related to Great Society programs. Since then, however,
the cumulative deviation has remained negative; the near-term low was -1.042
million units in 4Q2012. The rebound in multi-family starts since 2009:10 has
helped to trim the negative cumulative deviation, but as of 2018:05 it stood at
-447,000 units.
Figure 6. Monthly and
cumulative deviations of multi-family housing starts relative to interval
averages. Sources: BEA, CB and Delphi Advisors. Click image for larger view.
To summarize, our analysis -- whether in terms of starts per
person added to the population, or cumulative deviations in the number of units
started relative to the number that might be justified by population growth -- shows
that residential construction has not kept up with population changes. Perhaps
this is a piece of the puzzle explaining why purchase- and rental-price
affordability continue to be issues in many parts of the country. Particularly for
the multi-family market, our findings also highlight potential upside for mass-timber
market applications.
This analysis also buttresses our perception that the Millennial
demographic wave has yet to truly enter the “shelter” market as its predecessors did at comparable stages of life. High shelter costs and other financialhurdles being experienced by the Millennial cohort likely mean more people per
housing unit (both single- and multi-family) going forward. Finally, it implies
that any Millennial demographic-led housing-start peak may not only be delayed
but also more muted than otherwise expected as a function of the cohort’s size.