Why Home Values Will Go UP – 2 Reasons
ByReason #1 – An Increase in Population = An Increase in Demand
The population of the USA has an annual growth rate of 1.27% and has had this each year 1900. At our current population levels, we are adding about 3 million people to our population every year. Not too long ago we reached 300 million and some forecasts put us at 400 million in about 35 years. That means that about 1.3 – 1.5 million new households that are formed each year. These can include people who graduate from college and enter the work force, and adults who are currently living with their parents that decide to move out on their own.
The National Association of Realtors estimates that about 40% of all home buyers in today’s market are purchasing their first home – a perfect indication that this segment of the marketplace will continue to thrive even in the midst of our economic downturn.
The growth in population isn’t the only thing that increases demand for housing. Approximately 300,000 housing units are demolished each year due to functional obsolescence because buildings become old and outdated. This means that the actual demand for new housing is about 1.7 million new units each year in order to replace the demolished homes and house the new households that are formed. Okay; so now that we understand the demand for housing, what does the supply look like?
Reason #2 – Less Building = Less Supply
It’s no secret that home builders (and many others) are struggling in this economy. In fact, the number of new housing units being built went from a peak of 2.1 million in 2005 to less than one million in 2008, with 2009 also projected to come in below one million as the market continues to work off the excess supply of housing that was built during the last few years. Here’s an interesting breakdown of new housing starts since the year 2000:
- 2000 = 1.6 million new household units
- 2001 = 1.7 million new household units
- 2002 = 1.7 million new household units
- 2003 = 1.9 million new household units
- 2004 = 2.0 million new household units
- 2005 = 2.1 million new household units
- 2006 = 1.8 million new household units
- 2007 = 1.3 million new household units
- 2008 = less than one million new household units
- 2009 forecast = less than one million household units
As you can see, from 2000 – 2002, the supply of new housing units each year was right on to meet the demand of 1.7 million as outlined above. However, things started to get overbuilt from 2003 and 2006. Not surprisingly, home values went into decline from 2007 – 2009 as the market started working through this over-supply.
However, sometime during the next 1-2 years, the current oversupply of housing units will be completely absorbed due to the demand outlined above. In fact, if the trend continues, there could even be a housing shortage at some point in the next two years unless builders start building new household units at a much quicker pace! Do the math yourself:
- Demand for New Housing Units: approximately 1.7 million new units annually
- Supply of New Housing Units: less than one million annually
- Bottom Line: Demand will become greater than the supply at some point in the near future, and house prices will go up.
Remember, there is no “national housing market” as all real estate is local. Therefore, a state like Michigan that is losing population may take longer to see house prices recover; while a state that is gaining population, like Texas, may see house prices go up much sooner. In all cases, talk to your mortgage, financial, and real estate professionals for more details regarding your specific marketplace.
If you are even thinking that now might be a time for you to consider making a real estate purchase, then you definitely need to at least fully explore your options with a Certified Mortgage Planner and a Realtor. Low interest rates and low property values won’t stay this way forever, and I believe that if you are in a position to buy, now is the best time to do it! Great success to you!
