mortgage interest deductionAccording to NAHB economists Robert Denk and Paul Emrath, the U.S. single-family housing market is currently in an underbuilt state. This means that there is excess or pent-up demand for new construction that is not being met. This was determined by comparing the current state of the market to the expected trend that would occur if housing, labor and credit markets were functioning normally and generating a normal rate of household formations.

In 2005, there was a significant amount of overbuilding in the single family market. However the overbuilding had all but ceased by 2006. Since that time, the subsequent decline in production has been severe enough to more than offset the events of 2005.

So why is there now underbuilding in the market? The deficit in the total number of new single-family homes exists because of a corresponding deficit in new household formations. After all, if the number of new families decreases, then the demand for new family homes should decrease as well. This is probably due to high unemployment rates that have forced people to stay at home or delay buying new homes and starting families. Between 1960 and 2005, the United States has averaged 1.2 million net new households per year. Since 2005, the new household formations have been well below this average.

However as house prices stabilize and labor markets continue to improve, Denk and Emrath predict that more and more people will be ready to start the families that they have been delaying. Because of this, the number of new household formations may see a substantial increase. However, a sudden increase in new household formations is something that the current market may not be able to support. For this reason Denk and Emrath believe that this pent-up demand will have to be worked off by constructing new homes, which will impact single-family housing production in a positive way.

For more information about this research article, contact Paul Emrath at 800-368-5242 x8449 or pemrath@nahb.org.

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