Such a slowdown in long-term housing prospects seems difficult to grasp under the current climate of low mortgage interest rates, sharply rising home prices, strong sales, and tight inventories driving housing statistics to heights not seen in several years.
But structural changes in the economy from 2012 to 2025, including retiring baby boomers and a downward shift in immigration, suggest slower labor force growth and a reduced demand for housing.
The robust housing numbers seen in today’s market have more to do with limited supply and less to do with strong demand, said Doug Duncan, senior vice president and chief economist at Fannie Mae.
The supply of homes available for sale is below the long-term average in part because construction hasn’t ramped up and a significant number of homes backed by seriously delinquent loans must still work their way through the foreclosure process. Contributing to the low supply are institutional investors who have taken large chunks of single-family homes out of the supply chain to lease as rental properties.
“Demand has picked up a little bit, but mostly it’s been constraints on the supply side,” Duncan stated.
Returning to Historical Norms
Fannie Mae economists expect the housing market to return to historical norms by the end of 2015 or the beginning of 2016, when new housing production (single-family and multifamily starts and manufactured housing placements) — now at about 900,000 a year — are expected to reach about 1.8 million units a year. Long-term fixed mortgage rates, now at about 4.5 percent, also are expected to inch upward to what is considered a more normal rate. Historically, the long-term average interest rate on a 30-year mortgage is about 6.5 percent.
By 2016, housing construction jobs are projected to increase by about 400,000, bringing total housing construction jobs to about 2.5 million, said Patrick Simmons, director of strategic planning with the Fannie Mae Economic & Strategic Research Group.
“That is a pretty big bump in residential construction employment, but it is still way below the peak employment we saw in the sector back in 2006,” he said.
Labor Force Implications
Although the housing market is expected to be back to normal within three years, a slower labor force growth rate than the historical norm means less demand for new housing over the long term.
Fannie Mae’s Economic and Strategic Research group prepared two long-term work force projections based on the Census Bureau’s most recent population projections. Its base scenario forecasts labor force growth of 0.4 percent per year between 2012 and 2025, “an anemic rate of increase weaker than that plumbed at the depths of most postwar recessions,” Fannie Mae said in a recent edition of Housing Insights on the labor force and housing implications. A more optimistic scenario projects 0.9 percent annual growth. That number averaged 1.5 percent per year between 1948 and 2012, a level that Fannie Mae doesn’t see returning.
“Even using optimistic assumptions about future labor force participation rates, we project that work force growth between 2012 and 2025 will be well below the historical average,” according to the Fannie Mae Housing Insights paper. “Given the positive correlation between housing production and labor force growth, the anticipated marked slowdown in work force expansion in coming years implies weaker housing demand and homebuilding activity than observed in the past,” the article notes.
Simmons said Fannie Mae looked at the correlation between different factors and the production of new housing units.
“One of the surprising things we found was the rate of growth in the labor force was, in most cases, more highly correlated with the level of housing production than were things such as population growth, household growth, and growth in the number of jobs,” he said.
Baby Boomers and Immigration
Short-term cyclical factors drove about two-thirds of the labor force contraction during the Great Recession but longer-term forces — such as the retirement of baby boomers and reduced immigration — are playing a structural role in future labor force growth projections, said Josh Bivens, director of research and policy at the Economic Policy Institute (EPI), a nonprofit, non-partisan think tank that focuses on the economic condition of low- and middle-income Americans.
“Right now, baby boomers have started retiring and that will be a big driver of structural trends over the next 10 to 20 years as baby boomers age out of the work force,” Bivens said. “Immigration is a huge issue, especially for the longer term.”
The Social Security Administration forecasts 600,000 to 900,000 new immigrants will come into the United States per year. Bivens said this “implies a shrinking share of new immigrants into the work force, which has not been consistent with most of the past century.” During fairly heavy immigration inflows, those from the late 1990s and again from the mid 2000s, well over 1 million people per year were immigrating to the United States, he said.
“One of the things we are trying to do is highlight for the housing industry the implications of immigration for the demand side of the equation,” Duncan said.
In the decade 2010-2020, immigrants nationwide are projected to account for 32.2 percent of the growth in all households, 35.7 percent of growth in homeowners, and 26.4 percent of growth in renter households, according to the Research Institute for Housing America.
Those numbers translate into real money for the housing market. Analyzing census data, Americas Society/Council of the Americas and Partnership for a New American Economy recently found that immigrants have collectively added $3.7 trillion to U.S. housing wealth. The research finds the inflow of immigrants has benefitted housing markets in rural areas and cities that have been hard hit by the recession.
What happens with comprehensive immigration reform in Congress is the “wild card” in terms of future U.S. labor force growth. Immigration reform and its effect on the future labor force brings with it important implications for future housing demand.
“If indeed immigration is reformed, I would expect that would be a plus, for productivity gains, real income gains, work force growth, and demand for housing going forward,” Fannie Mae’s Duncan said.