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Economic trends.


In the short run, there is little doubt that interest rates are the most important determinant of the demand for housing. In the long run, however, demographic forces may be just as important, or perhaps even more important. Chart 1 illustrates the point.

The chart shows cumulative household formations and cumulative housing starts since 1964. As new households were formed, new single-family and multifamily housing units were started to meet the growing demand. From 1964 to 1989, about 41 million new housing units were started in response to the formation of about 37 1/2 million new households. Starts exceeded new household formations because some starts were not completed, some replaced worn out existing housing, vacancy rates drifted up and related factors. Nonetheless, it is fair to say that demographic forces reflected by household formations strongly influenced the pace of housing market activity.

Table 1 takes a closer look at some of the most important demographic forces and where those forces are headed in the 1990s. The first line of the table shows household headship rates by age in 1989. The household headship rate reflects the percentage of the population in a given age group that heads a separate household. For example, of 1,000 people 25 or younger in 1989, only 60 headed their own household, but 545 of 1,000 people aged 35 to 44 headed their own household. Because headship rates vary across age groups, changes in the age distribution of the population have and will continue to have a strong influence on changes in the number of households, and, therefore, changes in housing market activity. Nothing has influenced the age distribution of the population in the U.S. more during the past 40 years than the baby boom generation.

The baby boom generation--those individuals born from 1946 to 1964--is clearly evident in the population and household formation statistics shown in Table 1. During the 1960s, total population growth averaged 2.44 million per year. More than half of that growth was in the under 25 age group. Growth in this age group reflected the baby boomers and swelled the ranks of the nation's students, but did very little to generate new households, which only increased by about 1.1 million per year.

That all changed when the baby boomers aged a bit more. In the 1970s, total population growth averaged 2.27 million per year--a little less than during the 1960s; but the increases in the 25- to 34-year old age group shot up to 1.23 million per year as the baby boomers arrived. Because the headship rate of this age group is nearly 50 percent in contrast to the very low headship rate of the increase in the number of households averaged 1.74 million per year during the 1970s.

During the 1980s, the bulk of the baby boom generation moved into the 35- to 44-year old age group. The headship rate for this age group is a little higher than the one for the 25- to 34-year old age group, but not a lot. As a consequence, even though population growth averaged slightly more than growth during the 1970s, the increase in the number of households was significantly smaller. Reflecting this development, starts only averaged about 1 1/2 million units per year in the 1980s compared to about 1 3/4 million in the 1970s.

During the 1990s, population growth is projected to slow to 1.77 million per year; but, more important for housing demand, most of the growth will be in age groups that have already formed households. The baby boomers will contribute to a sharp rise in the population over 45. As a result, the annual increase in the number of households will slow to about 1.2 million. That implies that housing starts are likely to average about 1 1/4 to 1 1/2 million units per year in the 1990s. Changes in interest rates, unemployment and other such factors will dictate short-run changes in the 1990s well, just as they did in the past, but the demographic fundamentals have now clearly changed, and will contribute to more modest levels of starts (on average) during the next decade.
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Title Annotation:housing and mortgages
Author:Holloway, Thomas M.
Publication:Mortgage Banking
Article Type:column
Date:Jun 1, 1990
Previous Article:Secondary market.
Next Article:Boardroom view.

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