A NEW 10-YEAR FORECAST ON HOUSING and home finance predicts that demand for housing will result in the construction of 2 million new homes annually in the U.S. through 2013—exceeding the production rates of the 1980s and 1990s. The foundation for America's housing industry appears remarkably strong despite an expected rise in interest rates, according to five top housing economists who collaborated on the study. Their conclusions were reinforced by a combination of projected population and immigration growth and a national homeownership rate expected to exceed 70 percent over the coming decade.

“America's Housing Forecast,” which also examined the long-term outlook for home prices and mortgage funding, was released in late May by the Homeownership Alliance, an association of 18 national housing-related organizations. Co-authoring the study were chief economists David Berson of Fannie Mae; Frank Nothaft of Freddie Mac; Paul Merski of the Independent Community Bankers of America; David Seiders of the NAHB; and David Lereah of the National Association of Realtors.

At the heart of the forecast are expectations that an average of 1.32 to 1.63 million new households will be created each year, depending on whether immigration growth rates hold at moderate levels, or run higher, which several of the economists believe is more likely. A second, often overlooked factor is the number of net existing homes expected to be removed from the market—housing stock converted to other uses or demolished due to obsolescence and disasters. That number is projected to average nearly 400,000 a year, roughly twice the rate of the past 10 years.

STRONG OUTLOOK: David Seiders of the NAHB speaks about the findings of the 10-year housing forecast. A third critical assumption: Expectations that America's mortgage finance system will continue to have stable access to global capital markets and that policies, which have supported homeownership and the sale and securitization of mortgages, will remain intact.

Among their predictions, based on different immigration scenarios, are:

  • Housing demand. The number of new homes needed in the U.S. will run between 1.85 million and 2.17 million a year over the next 10 years. Both estimates exceed the 1.77 million homes supplied annually on average from 1994 to 2003; and the averages registered in the two prior 10-year periods (see chart, page 26). Conventional single-family homes will account for about 72 percent of new home construction, an increased share compared to the past 10 years.
  • Home Sales. New-home sales will rise in volume, averaging .97 to 1.13 million a year compared to .85 million sold over the past 10 years. Existing home turnover, meanwhile, including condos, will reach between 7.10 and 7.50 million homes a year compared to the 5.52 million sold, on average, over the past 10 years.
  • Home Prices. Homes will likely appreciate in price an average of 5 percent a year nationally from 2004 to 2013, but may top 6 percent if supply constraints continue to tighten. Falling unemployment, expectations that income growth will keep pace with home costs, and limited housing inventories all argue against the possibility of declines in home prices nationally—and in all but a handful of markets.
  • Homeownership: Changing demographics and the increasing impact of immigrants will support continued increases in homeownership from current record levels of 68.3 in 2003 to 70 percent or higher by the year 2013.
  • Mortgage Supply: Mortgage originations are projected to average nearly $3 trillion a year. That will result in residential mortgage debt growing at roughly an 8.25 percent annualized rate, more than doubling to $17 trillion over the next 10 years (or to $19 trillion if home prices grow 6 percent annually).
  • The press conference where the study's findings were released was briefly overshadowed by the Commerce Department announcement earlier that same day that new single-family home sales for April had fallen 11.8 percent to a 1.093 million units—the largest monthly percentage decline in a decade.

    The NAHB's David Seiders dismissed the apparent irony of the one-month decline against the larger backdrop of the study's forecast. Seiders noted that while there has been a gradually declining pattern in new-home sales from the first quarter, April's drop-off was inevitable given March's unusually high sales pace. Seiders attributed the spike in March to delays in activity early in the year resulting from poor weather followed by a surge in late first quarter sales.

    Still, the report pointed to several challenges and risks that could undermine the forecast. One is the pace of increasingly stringent land controls that are impairing housing affordability in many markets. Another is concern over federal budget deficits, which may hurt housing by pushing up interest rates further than expected while threatening funding for existing homeownership programs. Also of growing concern are fears of possible regulatory changes that could crimp the flow of funds available from secondary mortgage markets.

    Housing Supply and Demand (annual averages in 000s)
    1974-1983 1984-1993 1994-2003 Forecast 2004-2013*
    Change in Households 1,373 1,316 1,226 1,316 1,628
    Change in Vacancies 136 275 306 135 148
    Net Removals 290 104 235 398 398
    Total Net Demand 1,799 1,695 1,767 1,849 2,174
    Single-family 1,017 1,023 1,193 1,334 1,549
    Multifamily (2-4 units) 99 66 34 46 58
    Multifamily (5 or more units) 408 375 251 274 348
    Manufactured 275 232 289 195 219
    Total Supply 1,799 1,696 1,767 1,849 2,174
    * Forecast for "moderate" and "high" immigration projections

    Ultimately, the report's authors concluded, the forecast depends on the elaborate “partnership between the private sectors that produce, sell, and finance housing in America and the public sectors that regulate and influence resource allocation through the political process.” Assuming that balance holds fast, the long-term outlook for housing pointed to a prolonged period of unprecedented growth.

    “Even the lower end of this range is above the production levels of recent decades,” said Seiders.

    “A rising homeownership rate will translate into at least 10 million additional homeowners by 2013, with roughly one half of the gain accruing to minority households,” added David Lereah, of the NAR, in support of the projections.

    “With the national unemployment rate below 6 percent,” said Fannie Mae economist David Berson, and with “extremely low mortgage rates and economic growth accelerating, the likelihood of a decline in home prices at the national level is quite remote.”

    To download the report, go to www.homeownershipalliance.com.