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Economic trends.


As we enter the 1990s, few would deny that housing conditions in the U.S. are among the best, if not the best, in the world. Still, the decade began with fears about the outlook for new construction, trends in home prices, the viability of financial institutions, and the persistence of affordability problems. Many of these issues are addressed in a new study by the Joint Center for Housing Studies of Harvard University entitled The State of the Nation's Housing 1990.

The study begins by addressing the widely recognized impact of demographic changes on housing demand. The baby boom generation - those individuals born between 1946 and 1964 - boosted the rate of population growth in the U.S. significantly in the 1950s and early 1960s. Since then, the population growth rate has slowed and is expected to continue to do so in the 1990s. The formation of the population into households, which is very sensitive to the age-distribution of the population, has followed predictable patterns. When the bulk of the baby boomers hit their twenties in the 1970s, household formations soared, and, along with this surge in formations, new construction surged too. In the 1990s, household formations will slow because many baby boomers have already formed households and the subsequent generation is much smaller. Consequently, recognizing that new construction equals the sum of new household formations, changes in the number of vacant units, and replacements of worn-out units, it is clear that the pace of new construction is almost certain to slow.

Table 1 shows the sources of new construction demand. During the 1970s, household formations were so strong that new construction (excluding mobile homes) averaged nearly 1.8 million units per year. As formations slowed, so did the pace of construction activity. In the 1980s, new construction of structures amounted to 1.50 million units per year. In the early 1990s, activity is expected to slow to around 1.37 million units per year; then to drop to around 1.27 million units in the late 1990s. [Tabular Data Omitted]

However, the composition of these units is likely to change. Units are likely to be larger and have more amenities as the baby boomers move up from starter homes. Consequently, construction spending is likely to hold its own in the face of a decreasing number of units. The Joint Center notes: "Market forces point to steady growth of tradeup demand, with increases in the size and quality of new homes built countering declines in the number of units constructed." The implication is that the trend toward the construction of fewer units may not impact mortgage lending volume adversely.

The Joint Center also finds no evidence to support the claim that reduced demographic demand will result in falling home prices, as some have predicted. The study concludes: "...Housing prices are unlikely to ease during the 1990s...Today's homeowners have little reason to worry." Further, because homes are generally highly leveraged (i.e., homeowners borrow to cover most of the purchase price), the study demonstrates that homeownership remains one of the best vehicles for wealth accumulation and financial security for most households. Continued modest home price appreciation will ensure this role continues into the 1990s.

Unfortunately, affordability problems remain. Those who are not homeowners currently face the difficulty of overcoming cumulative price increases in the 1970s and much of the 1980s that drove home prices to levels beyond the means of most renters. Because homeownership is so vital to wealth accumulation, locked-out would-be buyers face a dilemma. The Joint Center notes: "This is the vicious circle would-be buyers face: lack of savings and wealth prevent them from securing a home, the very asset that has proven to be the best source of wealth accumulation for the vast majority of American households." Because home prices are not likely to decline, the Joint Center argues that "there is little reason to believe that the affordability problems of the past two decades will quickly fade away in the 1990s."

The study suggest that only 13.6 percent of the 29 million renters nationwide could qualify for a mortgage to buy a typical starter home. Further, of the 11 million young renter households - defined as households headed by individuals aged 25 to 34 - only 12 percent had both adequate savings to make the necessary down payment on a typical starter home and the income to meet mortgage payments. The down payment was clearly the bigger problem. Fully 81 percent of these households could not meet the down payment requirement. In short, the Joint Center study makes it clear that housing affordability remains a major obstacle to homeownership in the U.S.
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Title Annotation:Joint Center for Housing Studies report on housing
Author:Holloway, Thomas M.
Publication:Mortgage Banking
Date:Sep 1, 1990
Previous Article:Secondary market.
Next Article:Winds of change.

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