Recent data offers some hope that housing prices may have stabilized, but uncertainties about the rate of household formation leave longer-term question marks, said economist Karl "Chip" Case at a housing conference in Springfield yesterday sponsored by the Federal Home Loan Bank of Boston.
Case, professor emeritus of economics at Wellesley College and co-creator of the Case-Shiller Housing Price index, said that as of June housing prices in the 20 major cities nationwide the index tracks had all stopped their decline and begun to increase, a sign that the national housing market has stabilized.
Case also pointed to surveys on buyer sentiment about the future value of their homes, which have also turned positive and are in line with previous surveys of buyer sentiment in healthier, non-bubble markets.
But causes for concern remain, Case said. More than 14 million homes nationwide, out of a housing stock of approximately 130 million, are vacant, and the vacancy rate has slightly increased in recent months. That’s despite new home construction declining to a rate of about 500,000 per year in 2010, a 50-year low, Case said.
That suggests new household formation has severely declined, and it’s unclear what the causes may be. Normal household growth has been about 1 million to 1.5 million households per year, rising to 2 million households during the housing boom.
"I’m worried that when we finish up the 2010 census, we could find that we have fewer people [than expected]," Case said. "There’s no way you can have vacancies rising at the level of production that we have unless the number of households is smaller than we think or is falling. Falling number of households is a terrifying thought. The pessimistic projections [for 2010 household growth] were 1 million, or 900 thousand."
Part of the cause is doubling up, as people who are out of work move in with relatives or young people put off moving out in a tough job market, Case said. If and when the job market improves, most such people will form their own households, and therefore represent pent-up demand.
A more serious concern is the possibility that the decline in new household formation represents immigrants returning home, or American citizens emigrating to other countries.
"Talk to people who come from abroad to go to school here," Case said. "Fewer of them are staying. And some of the ones who came are going back….those are probably permanently lost households."
A long-term decline in the number of new households formed per year would mean it would take much longer to clear the huge unsold inventory created by the housing boom, and fewer construction and housing-related jobs for years to come.
While he remained optimistic overall, Case emphasized that the unprecedented market conditions made any forecast uncertain.
"We don’t understand, quite frankly, the psychology of the housing market well enough to make accurate predictions, in the presence of high inventory, to know what the market’s going to do," he said.
But given the personal, emotional, and financial benefits of homeownership, coupled with the current mortgage rate environment and previous price declines, the prospect of purchasing a home is "starting to become irresistible," he said, and that the market will avoid a double dip.
