FOR THE PAST FOUR YEARS AT LEAST, THE question with increasing intensity on everyone's lips is, “When will the housing bubble pop?” Characterizing the growing demand for housing and the related escalating prices as a bubble, in my opinion, indicates a misunderstanding of the problem.
Let me be clear: There is no bubble. For the past 30 years this nation has produced, on average, about 1.8 million new housing units a year. However, we now produce 400,000 to 500,000 second homes. I'd guess that in 1975, only 50,000 starts were second homes, if that. We therefore are producing approximately 450,000 less primary housing units now than we did 30 years ago. In the past 30 years we have added approximately 80 million people to our population, two-thirds of which are immigrants. It's plain and simple that the immigrant factor is important: They require housing. If the growth of population was primarily due to birth rates within the U.S., the demand for housing would be nowhere near where it is today.
The primary reason for the lack of production has been the phenomena of “not in my back yard” (NIMBY) politics. NIMBYism has gathered such strength that approximately 80 percent of the governors in their “State of the State” addresses raised the issue of controlling urban sprawl. One would think that highways, water and sewer facilities, and education issues were of much greater importance. The reason, of course, is that it is much easier to run on a platform claiming to stop urban sprawl than one claiming to fix highways or improve the educational system.
NIMBYism is natural. Robert Frost said there is something in nature that abhors development in one's back yard. Even Woody Allen himself came out against building in New York City when it was in his own neighborhood; this coming from a man whose entire career has extolled the value of city living in New York.
There are very few among us who would like to see something built in our back yard. As government becomes more and more responsive to the voters, we, as a nation, will have increasingly constricted supply.
When demand continues to exceed supply, it is the price that gives. Price, in my opinion, will continue to go up as the imbalance grows between supply and demand. Today in the U.S., people pay an average of 3.5 times their family income for their home. In England, which has even greater restriction on housing production, the average family pays 7 times its annual income for its home. In the U.S., our homes provide an average of about 680 square feet per person. In England, it is about 370 square feet per person. I predict that what we have to look forward to is the same market seen in England—home prices will go up approximately 75 percent and home size per person will be cut in half.
As prices escalate, speculators enter the market adding an artificial layer of demand. This raises prices faster than usual on the basis of demand for occupancy only. When prices rise too fast, there will be a slow down, speculators will be driven from the market, and normalized pricing will prevail. The market will grow as speculators re-enter the market, and there will be continual waves of an overheated market returning to just a good market and then back again.
Unfortunately for people who have opted against homeownership while waiting for the bubble to pop, there will continue to be nothing but sour grapes. Sometimes I am convinced that the people who scream the loudest about the bubble are the people who feel the worst that they did not participate in the housing boom. After all, it's the boom that has been with us for the past 14 years.
Editor's Note: This column is a forum provided to the CEOs of America's largest home builders in cooperation with the NAHB. Address responses to BIG BUILDER'S editor at email@example.com.
Robert Toll is chairman and CEO of Toll Brothers.