Big Picture: Supply vs. Demand
Why have residential real estate prices experienced an unusually rapid increase in last few years? That's the big question that we all want the answer to, right? There's one argument that goes something like this:
There just aren't enough homes for everyone. People are moving to the Puget Sound at a rapid pace, and homebuilding just isn't keeping up. Furthermore, even as more people move here, the size of households keeps shrinking, meaning that demand is increasing even faster! So it makes good sense for home prices to soar and rents to increase, because people have far less choices about where they will live than they did ten or twenty years ago.Indeed, this would be a pretty compelling argument, if it were backed up by the facts... but is it? I dug through the Census archives to find the answer.
As it turns out, most elements of the above argument are true. Population is indeed rising at a fairly rapid pace. From 1960 to 2000, King County population surged from 935,014 to 1,737,034—an increase of 86%. During that same time period, the average household size dropped 21%, from 3.04 to 2.39. These two statistics combine to give us a 136% net increase in the total demand as measured by the number of households (307,759 to 726,792).
On the supply side of the equation, the number of "housing units" also experienced a greater than two-fold increase (122%), from 333,959 in 1960 to 742,237 in 2000. Of course, 122% is not as large of an increase as 136%, so you can see that from 1960 to 2000, home building did not in fact keep up with demand. This caused the percentage of occupied housing in King County to steadily increase from 92.15% in 1960 to 97.92% in 2000.
This is all very interesting, and so far would appear to back up the "not enough housing" argument. Of course, it is said that the best lies are those that contain the most truth. The real boom in King County home prices didn't start until after the year 2000. So let's compare 2000 to 2005*, using numbers readily available directly from the Census website.
In 2000, there were 742,237 housing units available to 726,792 households, for an occupancy rate of 97.92%. In 2005, there were 792,682 housing units available to 747,157 households, dropping the occupancy rate to 94.26%, a level not seen since 1980. Whoa. It would appear that during the five years of most aggressive home price growth, home building has more than kept up with increased demand.
Here is the complete data table for 1960 to 2005:
| Year | Population | Households | Hshld Size | Hsng Units | % Occ. |
| 1960 | 935,014 | 307,759 | 3.04 | 333,959 | 92.15% |
| 1970 | 1,159,369 | 391,759 | 2.96 | 424,837 | 92.21% |
| 1980 | 1,269,898 | 497,263 | 2.55 | 525,562 | 94.62% |
| 1990 | 1,507,305 | 628,044 | 2.40 | 647,339 | 97.02% |
| 2000 | 1,737,034 | 726,792 | 2.39 | 742,237 | 97.92% |
| 2005* | 1,755,818 | 747,157 | 2.35 | 792,682 | 94.26% |
So what does this all mean? I think at the very least it shows that home building in King County has kept up with demand during the recent housing boom. It seems most likely that building has even surpassed demand by a non-trivial amount. If you have data that shows otherwise, I would love to see it. However, after considering the available data, I believe we can safely bury yet another unfounded argument that attempts to justify today's housing prices.
*2005 data based on the 2005 American Community Survey, which "is limited to the household population and excludes the population living in institutions, college dormitories, and other group quarters." Therefore, while total population is likely to appear low when compared directly to Census data, the number of housing units is also scaled down accordingly. Since this post is about housing supply for "households," the exclusion of group quarters does not affect the final "percent occupancy" calculations.
(US Census Bureau, 2000, 2005)
17 comments:
So what does a decrease in household size have to do with it? Is it presumed to mean less people living together, thus more houses needed? Couldn't it also just mean people having fewer children? What am I missing here?
(Glad to see the blog back. It was an RSS feed for a Spanish blog for a little while...)
So what does a decrease in household size have to do with it? Is it presumed to mean less people living together, thus more houses needed? Couldn't it also just mean people having fewer children? What am I missing here?
"Average household size" is simply the number obtained by dividing the total population by the total number of households. So yes, when the household size decreases, it by definition means fewer people are living together (whether children or adults) and thus more housing is needed.
For example, in a population of 100 that has an average household size of 2.5, there are 40 households (100 / 2.5), and thus there would need to be at least 40 "housing units." If the population doubled to 200, and the average household size decreased to 2.0, there are now 100 households (200 / 2.0), requiring an additional 60 units of housing. However, if the population doubled to 200 while the average household size held steady at 2.5, there are only 80 households, and an additional 40 units of housing required.
The average household size must be factored in when calculating the demand for housing, since the number of required housing units does not track directly with population, but rather with the number of households.
(Glad to see the blog back. It was an RSS feed for a Spanish blog for a little while...)
I have no idea what that would have been about. I didn't notice it. Did anyone else?
Why have residential real estate prices experienced an unusually rapid increase in last few years? That's the big question that we all want the answer to, right?
So only two blog readers so far have connected this to a CREDIT BUBBLE?
This is the big question I want the answer to: why do grown adults old enough to remember the dot-com bubble think house values will continue to appreciate at a double-digit lip?
A lot of the newer construction is not where the people want to be.
By and large, new constructions is built where people have not built before (available land). Meaning no one wanted to live there before, and they still don't.
In Vegas and AZ and areas that still have lots of available land, new construction plays a greater influence on resale prices, than it does here in the Seattle Area.
Where is most of the new construction being built in the stats you have? Is it the same place where the new population is converging? A lot of Microsoft new hirees, for example, don't want to live very far from work. Not much new construction in the area where many new people are hired. The area was pretty much built out well before 1990.
This is the big question I want the answer to: why do grown adults old enough to remember the dot-com bubble think house values will continue to appreciate at a double-digit lip?
Never underestimate the power of stupidity and large crowds...
Thanks for the explanation, Tim. I wasn't quite getting the real meaning of the numbers. You are indeed correct that in just numbers, small households means more housing demand, regardless of the reason for the small size.
As for the RSS thing, it probably got fixed when you republished to add the new post. I saw the RSS feed for at least 15 minutes, though. Maybe blogger hiccuped?
No reason to laugh at your theory, kaleetan. Makes as much logical sense to me as some of the other reasons put out there.
Where is most of the new construction being built in the stats you have?
I can't speak for the stats, but I can tell you what I've seen with my own eyes -- Maple Valley and Orting. There's huge numbers of houses in development there, entire subdivisions full of them, apparently built on spec for the most part, considering the "New Homes!" signs plastered everywhere.
The first thing I wonder when I see them is where people living there will work. Commuting to places like Microsoft would be out of the question for all but the most masochistic IMO. I could see maybe people working in Renton, but SR-167 has to be as bad as I-405 in the morning, and I can't even begin to imagine how bad the two lane roads like SR-169 and SR-18 would be.
Christina - You are exactly right about the Credit Bubble (though I'm guessing that more than two of us have made this connection).
kaleetan - hahahahahahahaha
If 9/11 caused the stock market plunge, then why did the S&P 500 turn almost a year before 9/11? Why did Nasdaq lose the lions share of it's value prior to 9/11? The terrorism bogeyman had little effect on the markets, and was a convenient excuse for the "irrational exuberance" of the Fed in the late 90's.
Also, if you look at the data you'll see that the fed had gone from 6.5% to 3.5% prior to 9/11, and their trajectory did not change after it.
When are you housing bulls going to start looking at facts? It's getting too easy to refute your baseless claims.
Kaleetan, stop taking the data I provide out of context.
Here are the federal funds rate changes per the fed meetings from 2000-2002:
2002
November 6 ... 50 1.25
2001
December 11 ... 25 1.75
November 6 ... 50 2.00
October 2 ... 50 2.50
September 17 ... 50 3.00
August 21 ... 25 3.50
June 27 ... 25 3.75
May 15 ... 50 4.00
April 18 ... 50 4.50
March 20 ... 50 5.00
January 31 ... 50 5.50
January 3 ... 50 6.00
Prior to Jan 3, 2001, the Federal Funds Rate was 6.5%
Notice how it started out at 6.5% prior to the first meeting in January 2001, then dropped to 3.5% in August (3% in 7 meetings). After 9/11, it dropped 1.75% after 4 meetings. Same basic trajectory.
Oddly enough, this 4.25% drop is similar to what Easy Al did after the 1987 stock market crash. I think he just figured it'd be easier to do it all in one year.
I think one reason for the greater demand is the increasing availability of financing. Years ago, people expected 20% down to buy and now people are buying with 0-5% down and interest only loans.
Did private mortgage insurance (PMI) go away? What's cheaper for the homebuyer putting 15% down: paying PMI for two years before achieving 20% equity, or taking out a 15-year HELOC balloon?
Redmondjp,
Correct BUT they go there to get NEW homes. Those new homes turn into old homes and who is going to go way out there to buy an old house? And they have to STAY cheaper to get people to go out there and buy them...hence...appreciation is lower. AND everyday I hear people whining about wanting to move closer in. The guy who cuts my hair bought acres and acres of basically unbuildable land in Sultan with a crappy house on it. And he's been crying the blues every since about the commute and how he may not be able to get out since his "gentleman farm" is mostly useless land.
I'll bet a whole lot more of your co-workers live closer in. And when the numbers of buyers drops to the point where there are only 3 buyers for every 10 houses for sale...best to own the better product.
I started in a market where only 3 of every 10 houses sells. Not a pretty picture. Make sure you have one that will make it to the top three.
kaleetan,
"Why were interest rates kept so low 2002, 2003"
It was a "save face" for the Country after 911. If they hadn't dropped interest rates immediately, the impact on the Country would have been even greater than it was. "We" didn't want to see Bin Ladin in some cave laughing about the destruction of our economy. Maybe if they caught him, they could have let the Country suffer through it. But with him not caught, we had to put on a good face. "You didn't hurt us!...much"
If Bush hadn't won the election, we would have seen things change faster. As it was, it waited until Greenspan left.
This is my personal opinion BTW, not an expert opinion.
My understanding is that since the HELOC is a recourse loan, in the event of a short sale you will owe income taxes on the unpaid balance. Unless you declare bankruptcy. Presumably, this would encourage the loan holders not to default on it if they get stuck with a giant tax bill as a result.
So is a HELOC preferable to PMI for the mortgagee, or the mortgagor? Of the people I know who've bought houses lately, those with <20% downpayment are going for the HELOC rather than the PMI. Were they simply told by their mortgage brokers or lenders "we're giving you A so you can avoid B" without wondering "why is A better than B? Let's go check." The assumption seems to be that HELOCs are better than PMI, but I'm not sure if it's better for both parties.
a HELOC currently goes for about 7.6% for fifteen years. PMI is about 0.0023% of the total mortgage, depending on how much is owed the lender. PMI can be removed in many cases when the following conditions are met: 24 consecutive months of ontime payments, and the mortgagee has at least 25% equity in the property.
I've seen "Rent vs. Buy", "How Much Home Can You Afford", rapid paydown calculators but no "PMI or HELOC" calculators online, which leads me to wonder if PMI went away. The cynic in me might think PMI would be a better deal for the homebuyer, otherwise the calculators would be out there.
I thought this blog was about the housing bubble, not the overall economy.
Uhmmm... is there a difference anymore?
BTW, nice job Tim on the census data, as I keep telling people "Its the NUMBERS stupid!" We can wax on about 'robust job growth', even though you've sized that up with data as well, and other RE talking points but the numbers prove what most economists already know.
We're in the midst of a credit-hangover the likes of which God has never seen...
I stated right there in the post where I got the data: The US Census Bureau. I would be quite amused to hear you try to explain why the US Census Bureau data is "misleading and false."
Oh, and I will say that you are rambling if your response (which I expect to be unnecessarily lengthy) diverges primarily into topics which are completely separate from the subject of this post.
For the record, in this post I researched the data behind one and only one argument: "home building is not keeping up with the increased demand due to population growth and declining household size."
If you post a response that deals with some subject other than that one, then yes, you are rambling. However, if you honestly believe you can "disprove" the Census Bureau's data, then by all means, be my guest.
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