The performance of housing markets in the short term is heavily influenced by economic and financial market factors that drive housing demand upward or downward over the course of business cycles. But over the long term, the average level of home sales and housing production is governed by underlying demand factors dominated by household growth, the need to replace units removed from the existing housing stock for one reason or another, and the appetite for second homes. Housing market activity soared to an unsustainable pace in 2005 as a positive economic and financial market environment combined with unusually aggressive mortgage lending and a surge in buying by investors/speculators. Some erosion of home sales and single-family production is in the cards for 2006, and possibly 2007, in order to restore a better supply-demand balance to housing markets in many parts of the country. But the NAHB's recently revised long-term forecast shows a record level of housing production for the entire 2005–2014 period as well as a record share for conventionally built single-family homes.
LONG-TERM DEMAND Long-term housing demand is dominated by growth in the number of households in the United States, and household growth is driven primarily by changes in the size and age structure of the population. Population change, in turn, is driven by patterns of births and deaths within the country as well as by net immigration. The NAHB's forecast for 2005–2014 shows an average annual household growth of about 1.5 million, the highest 10-year average on record.
There now are about 124 million housing units in the United States, and the median age of the housing stock has reached a record 33 years, pointing to a growing need to replace housing units in the coming years. There also has been a strong move toward teardowns and rebuilds of well-located units in recent years, and that is likely to continue. Consequently, the NAHB's long-term forecast shows an average annual net removal of more than 400,000 units for the 2005–2014 period, well above the average of recent decades.
The third major demand factor is housing vacancies, including second homes and vacant rental units. Rental vacancies are unusually high at this time, and the NAHB's forecast assumes a gradual reduction in coming years. On the other hand, there certainly will be growth in second homes. All things considered, the NAHB's long-term forecast projects an average annual growth in vacancies of 130,000 for the 2005–2014 period, a conservative estimate with some upside risk.
SUPPLY RESPONSE The supply side of the housing market will respond to growth in long-term demand, despite severe land-use constraints that will force changes to location as well as to the size and types of housing units produced. In the aggregate, housing producers will need to supply an average of 2.1 million units per year during the 2005–2014 period, spread across conventionally built single-family and multifamily structures as well as manufactured (HUD-code) homes.
The NAHB's forecast shows a 71 percent share for single-family homes during the 2005–2014 period, down from an outsized 78 percent share in 2005 but still a record on a 10-year average basis. Multifamily starts should account for nearly 20 percent of total new housing units, higher than the past 10 years but still well below earlier decades. Manufactured homes make up the remaining 10 percent, below earlier decades but up from historically low shares during the past five years.