New Household Demographics and House Prices

2012 NAHB International Builder’s Show2012 NAHB International Builder s ShowFebruary 8-11, 2012

David W. Berson, Ph.D.

Main Themes

Housing starts will ultimately rise due to

2

g y• Growth in households similar to or higher than the prior decade• Pent-up demand from new households deferred due to the recession

Forecast ranges are broad since the Census Bureau publishes widely Forecast ranges are broad since the Census Bureau publishes widely differing reports on households and vacancy rates• Decennial Census is viewed as the most accurate because it is a full count of the entire

population (at least in theory). • The timeliest measure of households comes from the Census Bureau’s Housing Vacancy

Survey (HVS), which is released quarterly and is a relatively small survey.

Roughly 1.4-2.4 million vacant units above equilibrium (probably closer to upper end)

Recession caused a shortfall of between 1.5-3.0 million households

National house prices have corrected to around normal valuationsNational house prices have corrected to around normal valuations

Background: Average Annual Household Growth g g3

2 000

1,600

1,800

2,000CPSDecennial CensusHVS

1,000

1,200

1,400

400

600

800

0

200

1960 1970 1980 1990 2000 2010

Source: Bureau of the Census (HVS is annual average of quarterly data. 12/2/2011 revision.)

Growth in Households 2000-2010

4

9 3%15 4%

3.7%4.2%

6.6% 7.5%

9.3%

9.3%

9.4%

10.1%

11.0%

13.9%

14.2%

15.4%

1 2%

23.4%

1.3%2.3%

3.5%

3.7%

4.9%5.1% 5.3%

5.3%

6.3%

7.1%

7.1% 7.4%8.1%8.2%

8.2%

8.9%9.3%13.2%

14.6%

17.2%

19.0%25.2%34.0%

6.6%

8.1%

8.4%

8.8%10.0%

11.7%

16.7% 17.4%

19.3%

19.6%

25.2%

4.4%

12.9%

16.5%17.1%

20.7%

0.0% to 5.0%5.1% to 10.0%10 1% to 15 0%

Source: Decennial Census

10.1% to 15.0%15.1% to 20.0%20.1% to 35.0%

Several Million Households Temporarily “Missing”

5

“Doubled up” households (at least 1 extra 18+ not in school and not the spouse/partner of household head) increased by 2 1 million (10 7%) overall and by 1 2 million (25 5%) of household head) increased by 2.1 million (10.7%) overall, and by 1.2 million (25.5%) for 25-34 year olds since 2007.

Doubled-Up Households

1618202224

20072011

810121416

Mill

ions

02468

Source: Census CPS/PMI analysis

0Doubled-Up Households 25-34 Year Olds Living With Parents

Headship Rates Fell the Most for Younger Age Groups (2006-Present)( )

6

32.5 5032.5

30 0

50

48

20-24 Year Olds (Left Axis)

30.0

2

48

46

cent

27.5 46

Per

25-34 Year Olds 25.0 44(Right Axis)

Source: Census CPS/Haver/PMI analysis

100500959085807570656022.5 42

Housing Starts Will Rise Due to Population Growth

An average of 1.1-1.5 million new units a year will need to be built this decade (a doubling from l l ) Th b d 1 1 1 3 ll h h ld l f 200k

7

current levels). This is based on 1.1-1.3 million new households on average, replacement of 200k-300k demolitions a year, less the working down of the current excess of 1.4-2.4 million units. This assumes only minimal growth in second/vacation homes (which grew ~125k a year over the last 40 years per HVS data), due to the current oversupply and housing finance situation.

Population projections are subject to high uncertainly due to potential changes in laws, unknown illegal immigration flows, immigration variations due to economic conditions, poor data on emigration, and a lack of clean data on demographics (age, persons per household, etc.) of immigrations.

1.31.51.7

Cha

nge

In

Mill

ions

0.50.70.91.1

rage

Ann

ual C

ouse

hold

s in

Source: Decennial Census/PMI

1970-1980 1980-1990 1990-2000 2000-2010 2010-2020(Forecast Range)Av

er Ho

Household Growth Scenarios

8

Average Annual Increase in Households 2010-2020 i Milli

Total Headship Rate50

Constant

Headship Rates 2020

Census Baseline

Immigration Population

Census Low

Immigration Population

2020 in Millions

45

46

47

48

49

Perc

ent

Constant

Negative Grow th

Weak Grow th

Strong Grow th

opu at o opu at o

Negative Growth (47.6%) 1.0 0.9Constant (48.2%) 1.2 1.1

Weak Growth (48.8%) 1.4 1.2Strong Growth (49.5%) 1.5 1.4

42

43

44

45

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020

We estimated scenarios for two different Census population growth forecasts and four headship rate forecasts (our baseline scenario is highlighted)

Source: Census CPS/Haver/PMI

Strong Growth (49.5%) 1.5 1.4

headship rate forecasts (our baseline scenario is highlighted).

Census Baseline Immigration population projections support total population growth of10.0% (31.2 million) and their Low Immigration projections support total population growth of 9.3% (28.5 million). We prefer the Low Immigration projections because we suspect the Census will revise down their population projections. Immigration fell recently due to weak employment prospects and greater illegal immigration enforcement.

Vacancies are High, but Not Easy to Estimate, Even for the Census Bureau!

Vacancy rates rising, but different sources are inconsistent.

9

15%

10%11%12%13%14%15%

cy R

ates

6%7%8%9%

10%

5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1

Vac

anc

Vacancy rates have risen over time due to:

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

HVS AHS Decennial ACS

Increase in vacation homes as wealth increased. Oversupply/missing households due to boom/bust.

We suspect there are more than 2 million excess vacant units above equilibrium, which happens to be in the ballpark (i.e. range of estimates) of the shortfall of households caused by the recession.The American Housing Survey (AHS) is a biennial Census survey of around 55k households The ACS is a The American Housing Survey (AHS) is a biennial Census survey of around 55k households. The ACS is a larger annual survey that replaces the Decennial long-form. Unlike ACS, the AHS returns to the same housing units year after year to gather data; therefore, this survey is ideal for analyzing the flow of households through housing.

1.4-2.4 Million Excess Vacant Housing Units

10

Method 1: Compare vacancy data to historical trendsH ld Off T O i R t d

Thousands of Units For Sale SeasonalHeld Off

Other For RentTemp.

OccupiedOccasion

al UseRented or

Sold Sum2011 - Q2 1,960 4,571 3,869 3,947 1,166 2,312 1,017 18,842 Trend (1965 - 2000) 1,575 3,860 3,273 3,904 1,314 2,501 1,051 17,478 excess 385 711 596 43 (148) (189) (34) 1,364

Source: Census HVS data (12/2/2011 revision)/Haver/PMI analysis

If vacancy rates return to a gradually growing trend-line based on 1965 to 2000 vacancies, then there are 1.4 million excess vacant units.

excess 385 711 596 43 (148) (189) (34) 1,364

Scenario AssumptionsExcess Housing

Method 2: Compare where we are now to the historical relationship between new housing starts and new households (HVS)

Scenario Assumptions(Million)

Difference of cumulative housing starts since 1999 and a trend level based on average new households to housing starts relationship during 1990s

No excess housing in 1999

2.4

Same as above except trend based on upward trend between 1964 and 1999

No excess housing in 1999

1.6

Housing Unit Vacancy Rates

9.2% 15 6%

11

9.3%9.3%

9.7%

10 7%

11.1%

11.3%

11.4%

13.1%13.2%

13 4% 14 6%

15.2%

15.6%20.5% 22.8%

7.9%

8.1%

8.6%

8.7%

9.2%9.3%

9.5% 9.5%

9.8%

9.9%

10.1%

10.2%10.4% 10.5%

10.7%

10 8%

10.8%12.4%

13.4%

13.4%

14.3%

14.6%

15.7%

10.8%

11.3%

12.2%12.3%

12.3%

%

12.5%

12.9%

13.3%

13.5%

15.7%16.3%

10.6% 12.0%

12 4%

12.5%

15.9%17.5%

7.0% to 10.0%10 0% to 13 0%12.4% 10.0% to 13.0%13.0% to 18.0%18.0% to 25.0%

Source: 2010 Decennial Census/PMI

Change in Vacancy Rates 2000-2010

1.9%

12

-0 2%

0.2%

1.1%

1.2%

1.6%

2.1%

2.2%

2.2%

2.3%

2.3%2.5%

2.8%

2.9%

3 6%4 0%-0.2%

0.5%

0.6%

0.8%

1.6% 1.6%

1.7%

1.7%

1.7%

1.8%1.8%

2.1%

2.1%

2.2%

2.3%2.6%

2.7%2.7%2.8%

3.2%

3.6%4.0%

5.1%

-0.9%0.9%

1.7%

1.7%

2.3%

2.5%

2.9%

3.1%3.2%

3.9%

-0.1%

0.8%

1.2% 1.7%

4.2%-1.0% to 0.0%0.0% to 2.0%2 0% t 4 0%2.0% to 4.0%4.0% to 6.0%

Areas with the largest increases in vacancies are NV and FL.

Vacancy rates fell in three states: NM, CO, HI.

Source: Decennial Census/PMI

House Prices About Fairly Valued

13

280 280

100

Prices excluding distressed sales are now 8.1% higher than trend income.

P l d

280

240

280

240

Including Distressed

uary

199

5 = Prices including

distressed sales are 1.4% lower than trend income.

Not shown: the

200

160

200

160Excluding Distressed

Inde

x, J

anu Not shown: the

Freddie Mac HPI is 13.5% below the current trend income index, while median existing SF house

120

80

120

80Disposable Personal g

prices are 18.2% below and Case-Shiller is 8.5% below. 1005009590

Sources: CoreLogic, Bureau of Economic Analysis /Haver Analytics

40 40

Income Per Capita

Distressed Home Sales are Still Dragging Prices Down

14

40 40

20 20

Homebuyer Tax Credit

Annual Rate20

0

20

00

20

0

20-20

40

-20

40

Year-to-Year

1110090807Sources: CoreLogic /Haver Analytics

-40 -40

Non-Distressed House Prices are Increasing

15

15.0 15.0Homebuyer

7.5 7.5

Tax Credit

0.0

-7.5

0.0

-7.5

-15.0 -15.0Annual

Rate

Year-to-Year

-22.5

-30.0

-22.5

-30.0

Rate

1110090807Sources: CoreLogic /Haver Analytics

30.0 30.0

Significant Differences in Regional House Appreciationg g pp16

-11.2% to -10.0%-10.0% to -5.0% -5.0% to 0.0%

Source: CoreLogic HPI Including Distressed, November 2011% Change – Year-to-YearHPI is already growing in some areas.

0.0% to 4.3%