Future housing demands and sources of mortgage money

Federal Home Loan Bank Board Journal, April, 1984 by Alan R. Winger

In the eyes of most housing experts ten years ago, the 1980s was to be a decade in which homeownership demands would accelerate and the Nation's money and capital would be hard-pressed to meet the financing needs of American home buyers. Our actual experience during the first three years of the decade raises questions about the strength of housing demands. Housing starts have averaged only a little over one million units per year, about half of what many expected. On the other hand, questions about the ability of our money and capital markets to provide for the home financing needs of Americans during the 1980s remain.

That demands have seemingly disappeared but funds needs have not present a paradox that needs an explanation. How much residential mortgage financing will be demanded during the remaining years of the 1980s? Will those dollars be forthcoming? What role will savings and loans play in satisfying these needs? These are the questions of concern in this article. HOUSING DEMANDS IN THE EIGHTIES New Unit Demands: "Need" Factors

Additions to the household population, removal of units from the stock, and added vacancies to accommodate mobility needs are the underlying demand factors in the new housing market. They give rise to the "need" for new dwellings. Of the three, population change is the most important, accounting for about 80 percent of new construction in the 1960s and 1970s. Most of the significant changes in new housing construction have also been a consequence of demographic developments. The sharply rising level of new housing construction in the 1970s, for example, was largely due to a rapid increase in net household formations.

Expectations for new housing construction were high coming into the 1980s, largely because of anticipated population developments. The "baby boom" of the 1940s and 1950s was still adding significantly to the age cohorts in which most new household formations occur. The upward trend in the formation of households by unrelated individuals was also expected to keep net household formations in the 1.5 to 2.0 million range. Given this as a base, it was not difficult to build a case for new housing starts of in excess of two million per year throughout the Eighties. New Unit Demands: Enabling Conditions

Market demand, of course, is more than a reflection of need. Casting dollar votes in some market not only reflects need or desire, the dollar votes must be there. Enabling conditions or ability to pay is a key element in demand.

Whether people form households depends on their economic circumstances. Most people, when they come to a certain point in their life cycle, seem to prefer a separate dwelling, and this preference usually comes to the foreground when they think about marrying, divorcing, graduating from college, getting their first job, etc. People, however, have the option of doubling up or living with others. What they do is importantly influenced by their economic situation. Unfavorable economic conditions can affect the timing of the formation of a new household. If unfavorable enough, they can also lead to a decision not to form a household or lead to the dissolution of an existing household. The enabling conditions are particularly important to the decisions individuals make about establishing a separate living arrangement since it is much easier for them to find living accommodations with others. Historical Perspective

Household formations in the 1960s averaged about 1 million per year. In the 1970s, they averaged about 1.6 million per year. Knowing why household formations increased 60 percent in the 1970s provides insight into earlier expectations about the 1980s and why it might be best now to revise these expectations somewhat downward.

Preliminaries: The Determinats of Household Formations. Studies of the determinants of household formations generally partition sources of household growth into three groups: 1) population growth, 2) changes in the age structure of the population, and 3) other factors working through headship rates (the proportion of individuals in a subgroup of the population who are a household head). The importance of population growth is apparent. Age distribution is potentially important because subgroup headship rates have differences. They increase with age, jumping sharply during the early, years of adulthood. If population increases irregularly, household formations will be affected. They will increase as the "bulge" works its way through the age cohorts where headship rates increase. If the population growth rate falls, household formation will diminish when those born during the period of declining growth began to reach these cohorts. The other factors include both sociological and economic variables. The sociological variables include all those influences that shape the values of people which affect their decisions to establish separate living quarters. Attitudes toward marriage is one of these. Attitudes toward privacy is another. The economic variables are primarily income and consumption cost factors that influence the ability of individuals to establish a household or separate living quarters.