ICS Magazine

Study Finds Any Drop in Housing Prices Likely Will Be Short-Lived

June 25, 2002
June 25 -(Dow Jones)- For some time now, economists have wondered whether the nation's housing market is a bubble waiting to pop. Commanding their attention: annual price-gain percentages in the double-digits, for at least the past five years, in many locations.

Now, the Joint Center for Housing Studies at Harvard University suggests that while a reversal in home prices is possible, it would probably be short-lived, The Wall Street Journal reported Tuesday.

The center's report offers a demographic look at household creation, a high level of which is vital for the health of the housing market. The center's yearly "State of the Nation's Housing" report, scheduled for release today, predicts that the number of U.S. households will increase 22.6% to 129 million in the next 20 years. That translates into about 1.19 million new households a year, only slightly lower than the 1.26 million new households created a year in the 1990s, a great decade for housing that included several years of record sales.

Although it is possible there could be a hiccup in the housing market in the short run, "it is clear that the underlying demographics will undergird the housing market" over the next decade and beyond, says Nicolas Retsinas, director of the Harvard housing center.

Some economists have warned that the pace of household creation will slow sharply in the years ahead, as baby boomers age and settle permanently into their homes. That, so far, has proved to be a misplaced fear, as boomers instead have opted to trade up to pricier houses and snap up second and third homes for vacations. Meanwhile, a surge of immigrant buyers over the past five years, made possible by easier mortgage terms, has made up for any shortfall.

The Harvard study expects these trends to continue and says tight supply should further support home-price growth. Builders, the report says, will need to add 1.7 million new homes and apartments a year to keep up with the demand. (The number is greater than the annual rate of household formation because it includes replacements for old homes that are destroyed, as well as demand for vacation homes.) In the past three years, builders have been adding only about 1.6 million new homes a year, in part because of constraints on land use that have made it harder to find places to build.

The Harvard center's report was funded by the Ford Foundation, as well as numerous housing-related companies and trade associations, including Fannie Mae, the National Association of Realtors and the Mortgage Bankers Association of America.