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Economic trends.


Affordability problems arise from a variety of sources. Inadequate income levels and growth, high interest rates, and large down payment requirements are among the most important, but high home prices and rapid home price appreciation are also to blame.

The role of new home construction is particularly important. Today's new home construction constitutes part of tomorrow's national housing stock. Consequently, both the characteristics of new homes and their prices can have important long-run effects on affordability.

New home prices and their characteristics, like nearly every other aspect of housing market activity in the past 25 years, has been strongly influenced by the baby boom generation. During the 1970s, the maturation of the baby boomers -- those individuals born from 1946 to 1964 -- led to an explosive increase in the number of new household formations and a concomitant surge in the demand for housing. Supply met this demand, but not without a sharp rise in prices. New home prices increased at an 11.1 percent annual rate from 1970 to 1980. Higher overall inflation rates, interest rates that in some years were less than the inflation rate, and expectations of sharply higher home prices in the future also contributed to the rise in prices.

In the 1980s, however, new household formations slowed significantly as the baby boomers continued to age and many had already formed their households. At the same time, the inflation rate decelerated sharply and was relatively subdued during most of the decade. Yet, new home prices still rose at nearly an 8 percent annual rate.

What accounts for continued rapid increases in new home prices even with such a sharp change in some of the most important fundamentals? Part of the answer clearly rest on the significant changes in the characteristics of new homes built during the 1980s. During the course of the decade, larger new homes were being constructed with more amenities. The baby boomers probably had a lot to do with the trend. It is true that many baby boomers were squeezed out of homeownership by affordability problems, but many others did become homeowners during the 1970s and enjoyed significant equity growth in their starter homes. During the 1980s, many of these households entered the move-up market, and the type of home they wanted to purchase (and could purchase due to their earlier gains and, often, rapidly increasing two-earner incomes) were larger and had more amenities.

Recently released data on the characteristics of new homes sold through 1989 dramatically illustrate the trends (Table 1). In 1980, the average square footage of new homes was 1,740 square feet; by 1989, for the first time ever, it had risen to more than 2,000 square feet. During the same period, the percentage of homes with two and a half bathrooms or more approximately doubled, while the share with four bedrooms or more rose 8 percentage points, the share with one fireplace or more rose 9 percentage points, and the share with garages for two or more cars jumped 14 percentage points.

Table : TABLE 1. Characteristics of New Homes Sold
 Percentage of
 New Homes with the Characteristics
Characteristics 1980 1985 1987 1989
Central air conditioning 63 70 71 76
2 1/2 bathrooms or more 25 29 38 44
4 bedrooms or more 20 18 23 28
1 fireplace or more 56 59 62 65
Garage for 2 cars or more 56 55 65 70


Average size (square feet) 1,740 1,785 1,905 2,035

To gauge the importance of these added features to rising home prices, the Census Bureau estimates the price of a hypothetical "constant quality" home that has the characteristics of a home built in 1982. Because the features are held constant, it is possible to see how much prices would have changed without additional amenities and how much those amenities contributed to the price increases.

Chart 1 shows actual and constant quality new home prices from 1970 to 1989. During the 1970s, both measures rose rapidly due to the fundamentals discussed earlier, but added amenities did little to boost prices. However, in the 1980s, constant-quality prices rose much less rapidly than actual prices, with the gap between the two measures reflecting how much added amenities contributed to price increases. At an annual rate, constant-quality prices rose just 3.4 percent during the decade.

Will added amenities continue to contribute to increases in new home prices? Probably. As the baby boomers continue to move through the age distribution of the population, their preferences for larger homes with more amenities are likely to persist, and so the housing stock will increasingly consist of larger and more expensive units. This will continue to be an important contributor to affordability problems for first-time homebuyers and, particularly, for those at the lower end of the income scale.

PHOTO : CHART 1 Average New Home Prices
COPYRIGHT 1990 Mortgage Bankers Association of America
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1990 Gale, Cengage Learning. All rights reserved.

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Title Annotation:affecting housing
Author:Holloway, Thomas M.
Publication:Mortgage Banking
Article Type:column
Date:Apr 1, 1990
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