NAHB’s Nation’s Building News takes a look at the anticipated surge in housing demand from the echo-boom generation.

As published in NAHB's Nation's Building News:

Depicting the current housing downturn in sobering terms, the 2009"State of the Nation's Housing"report released byHarvard University's Joint Center for Housing Studieson June 22 nevertheless gives home builders firm assurances of a resurgence in demand once the echo-boom generation gains a footing in the housing market.

Born from 1981-2000, members of the echo-boom generation, Harvard says, will boost annual average household growth to more than 1.25 million during the decade of 2010-2020 - even under the worst of circumstances.

"While the economic crisis has dampened household growth, the sheer size of the echo-boom generation will give a powerful boost to long-run housing demand," the report says.

However, "a severe and prolonged recession," according to the housing economists at Harvard, could reduce immigration, which is a key driver of household growth.

Two household growth projections were made for this year's report: one based on the latest population projection from the Census Bureau in which annual net immigration increases from 1.1 million in 2005 to 1.5 million in 2020, and more than 2.0 million by 2050; and one in which these immigration assumptions are cut by half as the result of a worse than expected recession.

Even under the weaker scenario, in which there would be 2.3 million fewer household formations in 2010-2020, average annual household growth can be expected to be comparable to the growth experienced from 1995-2005 as members of the echo-boom move into the prime household formation and home buying ages of 25 to 44.

"The number of echo boomers aged 25 to 44 will eclipse the number of baby boomers when they were those same ages by more than 5.9 million," according to the report.

"With the number of households in this age group projected to increase between 2.0 million and 3.4 million, the demand for rentals and starter homes will surge," the Joint Center says. "Meanwhile, with their longer life spans and sheer numbers relative to the preceding generation, the baby boomers will add dramatically to the number of households over 65. This will lift demand for retirement communities as well as services and home improvements that help seniors age in place."

Among other results related to household growth that will be felt in the home building industry:

  • The ethnic diversity of the echo-boomers will accelerate household growth among Hispanics and Asians. "Even under low immigration assumptions, Hispanic household growth will increase from 3.5 million in 1998-2008 to 4.5 million in 2010-2020, while Asian household growth will increase from 1.5 million to 2.5 million. White household growth, in contrast, will slow sharply from 4.3 million to 3.3 million, and black household growth will slip from 2.4 million to about 2.2 million.
  • Married couples without children - including empty-nesters - will be the fastest growing household type, followed closely by single-person households. "While the number of married couples with children will fall by nearly a million among whites, it will increase by more than a million among Asians and Hispanics."
  • Housing now occupied by many older white baby boomers will be well suited to the needs of younger and generally larger minority households, although there is a question about whether minority households, with their lower incomes, will be able to afford these homes.

    "As the baby boomers and older generations begin to turn over their homes to younger households, adjustments to the existing stock are likely, both through remodeling and pricing," the report says. "The first wave of change will occur in the inner suburbs of large metropolitan areas where people now in their 70s and 80s are concentrated, then fan out to the outer suburbs as the baby boomers start to downsize."

"With the echo baby boom driving demand for starter homes and apartments and the baby boom powering demand for homes suited to older Americans," the design professions will be called upon to deploy new technologies and designs to meet the aesthetic tastes and functional needs of a new, more diverse younger generation on the one hand and a generation in need of home modifications to help them age more safely and healthfully in place on the other," saidMohsen Mostafavi, dean of theHarvard University Graduate School of Design.

Finding the Bottom

Housing analysts at the Joint Center were less optimistic about the near-term outlook for housing, with "withered" housing demand struggling to get out from under the weight of crushing job losses, house price deflation and tighter credit standards.

"The best that can be said of the market is that house price corrections and steep cuts in housing production are creating the conditions that will lead to an eventual recovery," said Eric Belsky, executive director of the Joint Center. "For now, markets remain under considerable stress."

On hand for the release of the report in New York, Gary Garczynski, president of NAHB in 2002, said that the association is "perhaps a tad more optimistic about the immediate outlook for housing" than the Joint Center.

"We believe that we are at or very near the bottom of the market," Garczynski said. "Existing home sales are rising, new home sales have bottomed, the inventory of unsold homes is slowly being whittled down and the decline in home values appears to be moderating. Equally important, builders and consumers appear to be a little more confident than they were three to six months ago."

He also cited the beneficial effects of a significant rise in housing affordability and the $8,000 federal tax credit for first-time home buyers, but voiced agreement with the Joint Center's view that rebuilding the housing finance system and restoring the flow of credit to home builders is critical to turning around the housing market.

"The credit crunch for builders has seriously undercut the nation's housing delivery system. Until we get credit flowing to builders for construction and development loans, it will be tough to revive this economy," Garczynski said.

"Moreover, the nation's housing finance system needs to be shored up. Today, nearly all new mortgage originations are government backed - flowing throughFannie MaeandFreddie Macor insured or guaranteed byFHAandVA." Also, "the private market for jumbo loans is virtually nonexistent....Private investors must regain their confidence and get back in the market before the jumbo loan market can turn around."

Garczynski said that the recovery is likely to be slow and spotty, beginning in places that did not experience unsustainable increases in housing production during the boom years. "Generally speaking, housing markets closer to the urban core and job centers could be on the leading edge of the recovery. Outlying rings of metropolitan areas will recover later once the inventory of unsold units declines to more normal levels."

He also noted that demand for infill and higher density development could increase markedly in the period ahead. "This will require a spirit of cooperation between builders and the local officials who control the zoning and development process," he said. "Hopefully, this will lead to greater acceptance of the smart growth principles NAHB has been advocating since the beginning of this decade."