Real Estate Economics: Chapter 9 Housing Markets

Income Changes

A rise in income can cause a change in the TYPE OF UNIT, or in the AMENITIES demanded. Examples include the addition of swimming pools, family rooms, extra bathrooms, and the like. A decline in income leads to more modest housing and perhaps to doubling up. When income increases, they frequently move out and seek a dwelling of their own, a process called "undoubling." Income changes must also be compared to the rate of inflation. Usually, the Consumer Price Index (CPI) is used. When personal income is increasing, but the CPI is increasing more, then REAL INCOME is decreasing! Also, the CPI measures price changes in ALL ITEMS. Homes can change in price at a different rate, or even direction, than the CPI. This was very noticeable in 2003-2007. When this happens, people's ability to buy a home, on average, declines. One measure of this it the first-time home buyer affordability index. A slightly different measure is the ratio of the median home price to the median household income. ("Median" is the middle number in a list from the lowest number to the highest.) Since 1989, this ratio has average 6.1, with a low of 4 in 1996 (favorable to home buying) and a high of 10 in 2006. Notice that the ratio only got to 6 in 1990, when the previous home price peak was reached. This helps us to see that the year 2006 clearly was a highly unusual speculative price bubble! Note that the ratio passed the previous high by 2003, a clear advance warning of the collapse that was to come. In the 1980s, housing prices rose more rapidly than income. Although the demand for housing increased during this period, this affordability problem kept demand from rising further. But in the early to mid-1990s, housing prices leveled off or declined in some areas, while incomes held steady. This led to an increase in house affordability. Then in the mid-2000s, housing prices soared much faster than incomes, and affordability was a major problem. This reversed, with the home price collapse of the late 2000 era. This also teaches us that AFFORDABILITY IS CYCLICAL, as both affordability graph show!

Is the Housing Suitable?

At any given time, the housing supply consists of the existing dwelling units. Two special features of real estate are its long life and fixed location. The suitability of existing housing becomes most important.

Choosing Housing Location

As tastes and lifestyles change, housing demand changes. One variable is WHERE people choose to live. We can live in a big city, a suburb, or a small town, as just one example. In the distant past, where we lived was dominated by where we could find work. Gradually, that bond was loosened, as roads (and trains) improved, allowing a longer commute to and from work. Now, more people are also able to work at home, for some or all of their work time. And, because people live longer than they did 50-years ago, there are more retired people, whose residence is no longer tied to their job. In turn, these people buy food, gas, and services where they live, so that jobs are created in new locations. Even more important is the growing flexibility for locating many basic industries. The Internet allows many businesses to access specialized services, such as patent attorneys, architects insurance services, and others, without the need to locate in a big city. Improvements in trucking, rail, and air freight services allow many businesses to serve distant customers far better than before. All of these issues are making job location, and therefore housing location, far more flexible than before. Another aspect of location choice is our choice of neighborhood. Neighborhoods vary in how desirable people perceive them to be. Sometimes, this is because of a remote location, perhaps poorly served by public transport or freeways. More often, this is because of perceptions of crime rates, or school quality. But perceptions can change! New freeways or bus routes can open. Crime rates can improve, as can schools. And sometimes, prices in better neighborhoods increase, to where people are more willing to accept less desirable neighborhoods. Thus, neighborhoods can be fashionable, fall out of fashion, and come back in fashion.

Calculating the Affordabiilty Index

1. Determine the median price home, say $400,000. 2. Calculate the loan payment for an 80% loan at the current interest rate, at 6%. Then $400,000 x 80% = $320,000 loan @ 6% for 30-years = $1,918.56 monthly payment for principal and interest. Then add in monthly property taxes and insurance, for a PITI monthly payment of $2,500. 3. Calculate the monthly income needed to qualify for a monthly PITI payment of $2,500, using a 30% qualifying ratio (payment should not exceed 30% of monthly income). Then $2,500 divided by 0.30 = $8,333 x 12-months = $100,000 (actual $99,999) annual income needed to qualify for a $320,000 loan, and a $400,000 home. 4. Next, using census data, determine how many households have incomes of $100,000 or more, say 30,000 households. Next, determine the total number of households in the area, be it city, county, state or national; say the area has 100,000 households. Then the affordability index is calculated as follows: 30,000 Qualifying Households ÷ 100,000 Total Households = 30% Affordability Index This means that only 30% of the households in the area can afford to buy the median priced home. A high percentage is good news for the local housing market, while a low percentage is not. Current national and local affordability index ratings are published in REALTOR magazines and available to their Web site (www.realtor.com).

What About Housing Conditions?

Because of the long life of housing structures, the condition of existing housing is an important issue. Few houses are built of materials that will last for a long period of time without maintenance. Housing units are vulnerable to deterioration over their lifetimes. The extent to which this has happened is of major interest to the real estate economist. Many older homes are not receiving adequate maintenance and are gradually deteriorating. When this happens to an entire neighborhood, blight gradually sets in. The decaying condition of the neighborhood seems to deter people from further maintenance, so that the blighted areas gets worse and bigger. This has led to the complete abandonment of whole blocks of buildings in areas of cities like New York, Detroit, and Cleveland. Such abandoned houses effectively reduce the supply of housing units, because people refuse to more into the area. This condition, which need not occur, is being carefully studied by urban policymakers and is a central issue for the future.

What About Housing Features?

Buyers and renters tend to seek amenities, which are the benefits of ownership or occupancy. These can include physical features such as space, age, condition, and appointments. Some features can be measured by objective scales or techniques. Other amenities are not so objective. They depend on taste, status, and public opinion. These features are often subject to fads, as well as being hard to measure. Forecasting residential markets is thus complicated by the difficulty of forecasting the attitudes of buyers, sellers, renter, and landlords toward amenities. Buyers and sellers in the past have periodically changed their view on the importance of such amenities as the size of units, newness, unconventional architecture, and suburban versus central living. Future changes must be considered in forecasting the housing market. One example is the issue of energy usage. This is the issue of "green building." Is the building designed to use relatively low levels of energy and water? Are the materials selected to minimize impacts on scarce materials or endangered locations? Structures consume a major fraction of total U.S. energy use, and it's very clear that structure energy use can easily be reduced by quite a bit. Will codes require this, or will buyers demand it? Another example is the preservation of older buildings. Tastes change, so older buildings can fall out of favor. Many cities now inventory older buildings, to identify those with historical significance, perhaps for the architectural style, or connection to past events. There are major legal, economic, and cultural issues with preserving such buildings. It's not at all clear how preservation disputes will be resolved. A third example of this concept is the issue of the density of occupancy. The federal government has used an average household density of one person per room as a housing goal. Some segments of the housing market are seeking lower density, and others are choosing higher densities, to free income for other purposes. Over the last 20-years, the trend in new home construction has been to reduce average density, or increase the number of rooms relative to the number of occupants. How will density be in the future? Will crushing home prices force extended families to stay together and share housing costs? Some new subdivisions in the Inland Empire of California were advertising "up to eleven bedrooms." With the recession of the late 2000s, new home sizes are shrinking again! As buildings age, it becomes more likely that some aspect of the housing unit will not suit people's changing desires for amenity features. Major changes in the features, design, or equipment of houses occur surprisingly slowly. The lifetime of an average house is long enough that some elements of design become out of date, old-fashioned, unworkable, inefficient, or irreparable. As this happens, the housing unit becomes increasingly obsolete unless corrected by remodeling. A study of neighborhoods must consider the amount of obsolete features and the remodeling or renovation rate. Will there be buyers in 30-years for the very large homes in deep suburban locations that were featured in 2004?

Availability of Credit

Buying a home is the largest single purchase that most people ever make, and few people have the resources to pay cash for a home. The availability and cost of mortgage credit has an important influence on people's ability to buy, and therefore, it has an impact on the demand for housing. Lower mortgage interest rates (or easier loan terms) have the effect of increasing the demand for housing at any given level of income. Home ownership rises whenever rates drop! Credit availability is critical to understanding real estate demand, and especially bubbles and other major shifts in demand! A significant increase in housing demand in the past century has occurred because of liberal changes in mortgage credit. 100-years ago, real estate loans were limited to a 2- to 5-year term, interest-only, and renewed at the lender's discretion. Now, 30- to 40-year fully amortized loans are common. In the 2003-2007 period, special loan features, such as below-market adjustable "teaser" rates, and interest-only loans allowed many people to acquire a home they otherwise would not have been able to afford. Unfortunately, we now see that some loan features, especially teaser rates, encouraged people to buy homes that they could not hope to continue to pay for. We can see that mortgage interest rates vary. Over longer periods, they clearly are cyclical, moving up and then down. Rates are not the only aspect of financing that is cyclical. For example, government-insured/guaranteed FHA or VA loans were just under 20% of the total in 1994, dropped to under 5% in 2006, and went up to 20% again in 2008. Another variable is how much debt consumers are willing or able to take on. The increase from late 2004 to the peak in late 2008 was a 4-year 20% increase, followed by a 1-year 5% drop! It is clear that any future changes in mortgage credit will affect housing demand. Any U.S. capital shortage in the future will bring hard times to the real estate housing market. Economists closely watch the U.S. savings rate and the rate of foreign investment for signs of shifts. If the savings rate and the rate of foreign investment in the U.S. capital market increases, that will spell good news for the housing market. The size of the U.S. budget deficit also has an impact on the availability and cost of mortgage money. If the U.S. government must finance a large deficit, it can crowd out the private sector, driving up interest rates. If plentiful affordable housing is a national goal, society will need to establish capital priorities and reorganize financial institutions, so that mortgage credit can remain affordable.

Housing Markets

Communities contain many different land uses, but the most common is residential housing. Housing land use includes homes, apartments, hotels, motels, and boarding homes. Previously you learned that the allocation of land in a mixed capitalistic economy occurs mostly in the marketplace. There buyers and sellers interact, and eventually a price is determined and a real estate sale takes place. But governments also have a powerful influence on the final outcome of a real estate sale and on the future use of the property.

The Future of Construction

Does all of this gloom mean that new construction is finished for years? Not at all! Remember that real estate markets are ALWAYS strongly influenced by local factors. Average data are only averages! The past price increases shown in Figure 9.9 (Page 253) are averages of 20 locations. The increase varied around the country, by neighborhood and by price range. Locations that had a smaller increase generally have had smaller declines and fewer foreclosures. Location is not the only issue. The housing market contains a range of different products, as discussed earlier. Some products are now stronger than others. Figure 9.11 (Page 254) rates the 2010 development prospects for different categories of for-sale housing, based on a survey of developers. Similar annual surveys are helpful in understanding future market trends!

Filtering

Filtering is a central pattern of the residential market, given the long life of dwellings and the changing needs and tastes of people. Problems that develop during the filtering process nearly always have to do with the condition or obsolescence of the unit. Housing units are clearly capable of periodic renovation and renewal, if social and economic circumstances so dictate. The American student of real estate should realize that housing units in many other countries are expected to last hundreds of years. In many European cities, it's common to live in a building that is more than 300-years old. These buildings are given repair and periodic remodeling, and provide good housing at costs less expensive than new construction. The existence of slums in the United States is PRIMARILY a breakdown in the on going repair and renovation process that dwelling units MUST RECEIVE, as they filter through a series of occupants and owners. This point deserves MUCH more attention than we, as a society, have given it in the past!

The Influence of Confidence

Four walls and a roof are the minimum requirements for housing. Our income usually allows for more, and we usually want more. How much housing we demand is partly determined by how confident we are about our job, income, health, relationships, and so on. Consumer confidence also varies over time. Consumer Confidence Index cyclical changes is usually released by the Conference Board (www.conference-board.org). Clearly, demand drops when confidence drops! These changes show the year-to-year change in confidence, both monthly and in a 12-month moving average.

Demolition and Destruction

In a changing community, any land use will eventually become the WRONG USE of the site at some future time. Changes in the community almost guarantee that this will happen. As a better use comes along, land values rise. The contribution of the existing building to the total property value decreases, as the land value increases. The building contribution also decreases in value as the building gets older, and decreases more if the existing use is affected by new buildings with better uses. At a certain point, it becomes economically profitable to tear down the old building, and build a new one to reflect the new highest and best use of the land. At this point the old structure has reached the end of its economic life. This economic life can end LONG BEFORE the building has reached the end of its physical life, depending on its location and the rate of change of the community. Demolition is a reality in every city! Not all buildings are torn down because they have reached the end of their economic lives. Some are destroyed by fire, earthquakes, and other disasters. Some buildings are demolished in order to build public improvements, such as highways and schools, or from urban renewal. In some American communities, demolition for urban renewal and highway purposes noticeably reduces the existing housing stock. In forecasting the total future housing supply, analyst do not assume that the existing stock will be there forever. Some of the units will not be kept up, and reach the end of their physical lives. Other units will be torn down at the end of their economic lives, for construction of nonresidential properties. The probable rate of demolition for various public purposes must also be take into account. In some communities, the number of homes demolished to make way for new public improvements exceeds the number demolished because of a loss in economic life. Public projects are planned relatively far in advance, and their impact on supply can be anticipated.

Conversion and Its Effect on Supply

In addition to demolition, the housing stock is changed by conversions. Conversions can increase the number of housing units, by converting houses or other structures into apartments or flats. Some conversions may change a residential unit into an office, medical center, or other nonresidential use, and this reduces the housing supply. One must combine the additions and subtractions to determine what net effect conversions have on the local housing market. Conversion is not a major force in the change of total housing supply. Data on past conversions are obtainable from the same building permit sources as demolition and construction data. However, another type of conversion is important, even though the total number of units may not change. This is the change of rental apartment units to "for-sale" condominiums, or rental homes to ower-occupied. Sometimes, rent control will block evictions of tenants to allow owner-occupancy. An some cities block condo conversions, leading to multiple buyers as tenants-in-common owners, each planning on occupying a specific unit. These TIC CONVERSIONS bypass the need for a condo conversion, but are considered more risky for buyers and sellers than a condo. The rental-to-owner occupancy change can also go in the opposite direction! Some condo units have been brought by investors, who rent them out. Due to the big drop in starter home prices in 2008 and 2009, many homes (including a lot that were in foreclosure) have been bought by investors and rented out.

Suitable for Whom?

In general, the long life of residential real estate means that the building must have sufficient flexibility to meet the changing needs of the long-term occupant or the differing needs of a series of users. This need for flexibility is a major reason for the slow and cautious rate of change in building design. Only the rich can afford to risk large sums to build a radical design that others may not be willing to buy. Long life also means that the product can be expected to be occupied by people of differing backgrounds and income. Because older units are generally in poorer condition, more obsolete, and less desirable than new ones, their values are generally less than new ones. Housing units are typically occupied by lower-income users as the units get older. Most housing for lower-income occupants comes from this process, which is called filtering. This is also described as a "trickle-down" process.

* The Supply of Residential Housing

It is important to recognize that housing differs from many other economic commodities, because a very large percentage of the demand is met by the supply of units that are already in existence. In boom years, new construction has added around 2% per year to our national housing stock. Most local areas experience a similar percentage increase. The existing stock is 98% or more of all the housing supply in any particular year. Economists consider the supply of real estate housing to be fixed in the short run. A change in supply is viewed as a slow process, occurring over a long period of time. New construction provides jobs for many, so it's important to the overall economy. It also varies a lot, making it a sensitive measure of the economy. Figure 9.7 (page 244) shows housing starts (seasonally adjusted) since 1987. The peak month reached a 2.3 million home annual rate in 2006, but dropped to an annual rate of 0.5 million in late 2008, a drop of almost 80%! The supply of housing must be studied from two viewpoints: 1. The total number of units 2. The quality or suitability of the units. SUITABILITY involves the types of units, their condition, etc.

Future Supply Trends

Many observers say that increasing restrictions on new construction and lack of key resources will create a housing shortage in the future. Increasing shortages have driven up the cost of land, capital, labor, and many of the raw materials that are needed by the construction industry. With rising costs, a developer will build new housing only when home prices are expected to go up as fast as or faster than costs. Some forecast that future housing costs and prices will continue to increase faster than buyer incomes, thereby causing a reduction in the demand for new housing construction. The renovation and remodeling of the existing housing stock may be a more significant factor for the future housing supply than has been true for the last several decades. Some advocates say that the construction of second units (Granny units) is the best solution for a housing shortage. This idea has met with some resistance from local governments and residents.

New Construction

New construction varies greatly from year to year and from area to area. The city of Brentwood, in the San Francisco Bay Area, grew from 150 dwellings in 1970 to 20,000 units in 2010! For many places, new construction is the largest element in the yearly change in housing supply. New construction occurs only when the required resources are available. There are the classic 4-elements of land, labor, capital, entrepreneurial skills. The cost of obtaining these resources must be in balance with each other and with the housing prices found in the market place. Changes in the availability of these resources will change their prices and affect the ability to build for a profit. Past experience demonstrates that shortages in these resources do occur. Example: Land shortages can result from environmental restrictions or governmental attitudes toward the zoning of land. Labor shortages can result from attempts to increase housing construction beyond the limits of the available trained workforce. Capital shortages, or so-called "credit crunch," consisting of a shrinking money supply and high interest rates, have sometimes restricted new housing construction. Shortages of capital also show up as shortages of raw materials, because the raw materials require plants, mines, wells, and the like to produce them. Entrepreneurial shortages are less common in this country, because the nature of house construction encourages people in the housing industry to learn development skills. Other countries with different social attitudes have had difficulty in obtaining sufficient people with necessary development skills and knowledge. Forecasts of new construction have to consider the availability of related resources. The major factors influencing recent variations in new construction have been changes in the cost and availability of capital and the current state of the local economy. Table 9.2 (page 247) shows the peak single family year, 2005, and the dramatic drop since. Compare the number of permits in 2005 with the other years shown, to see how abnormal that time was. Notice that multiple unit permits have varied much less than single family residence permits (at least until 2009)!

Can Consumer Taste and Lifestyles Be Forecasted?

No one can say how long a particular fancy will last, or how widespread it will become. They only certainty is change itself. However, real estate analysts should constantly monitor the market for change. Students of marketing suggest that changes in taste appear first in people who are fashion conscious, then trickle down to the general population. Will housing styles be as volatile as clothing fashion? Will Santa Fe and Mediterranean housing motifs be like the miniskirt? Are huge houses on small lots in, and condos out? No one knows for sure, but because of tradition and the long life of homes, changes in housing taste tend to occur slowly. This usually allows builder to adjust their inventory so as not to be stuck with unsold, unappealing homes. For existing homes, updating and remodeling are ways to maintain appeal and value. One additional note: A major reason for the increase in new home prices in the early 2000s was the buyer's desire for a larger home. If today's new homes were only 1,500 square feet, like the homes built in the 1970s, the cost would be considerably less than the 3,500+ square -foot homes of the 2000s. So the demand for different-sized home changes over time!

The Importance of Population Trends

Of all the factors that influence long-term housing demand, population is the most important. Population information is readily available. Demographic change is especially easy to follow, because of the time delay before babies become adults. Researchers can forecast the demography of the next 10-years, by adding 10-years to the present age composition of a population and then adjusting for births, deaths, and in-and-out migration, both domestic and foreign. Migration varies greatly by region, so these forecasts are more reliable in slowly changing area than in rapidly changing ones. Each area has its own demographic breakdown, and future changes in each will be different. In areas with lots of children, they will grow up and want apartments. In other areas, the middle-aged couples will grow older, find big homes burdensome, and put their houses up for sale. In another area, the young apartment dwellers may be marrying, having children, and seeking larger dwelling units. For the nation as a whole, the 1980s had a strong housing demand, as the baby boomers of the 1950s became the homebuyers of the 1980s. However, many forecasted that the 1990s would be different, as the decline in the birth rate during the 1960s and 1970s was reflected in the declining number of people reaching homeowner age. The forecasted drop in the number of new household formations in the 1990s led some economists to calculate that, in some regions, the housing market would become a buyer's market, in sharp contrast to the seller's market of the 1980s. In some cases, this did occur. But it must be remembered that local real estate trends can differ from national trends. In certain areas, such as California, Florida, and Texas, massive foreign immigration generated a sharp increase in housing needs. By the mid-2000s, housing demand was strong in most of the United States (and world), due to an expanding population, and fueled by low interest rates and liberal financing.

Sources of Information about Population and Demography Trends

Population and demographic breakdowns and projections are frequently available from county or state planning offices. Their projection periods range from 10 to 50-years. The longer-range forecasts are less reliable. Good information on population characteristics is compiled every 10-years, when the national housing and population censuses are taken. The government tries to estimate and update the information each year. When attempting to gather this information, be sure to check with the U.S. Department of Housing and Urban Development, state planning departments, local universities, utility companies, regional, county or city planning departments, or private research firms. Much research may have already been done.

What About Housing Location?

Remember that another unique characteristic of real estate is its fixed and location. Because of this, it's possible for changes in the community to make a certain use of the land no longer suitable, that is LOCATIONALLY OBSOLETE. A building that is nearly new, but at a changing location, could become so obsolete as to be town down, causing a fair amount of economic waste. This waste can be reduced if the building has the flexibility to be converted to another profitable use. The problem of fixed location is compounded by the long life of buildings, as compared with the rate of change of the community in which the buildings are located. This has been especially true of rapidly growing communities in the western United States. This type of obsolescence, which shortens the economic life of the building, has a noticeable influence on the rate of demolition in the affected community. Over the years, as a community's population mix or demography changes, the housing supply must meet these demand changes to maintain equilibrium.

$$$ Affordability Index $$$

The National Association of REALTORS and the California Association of REALTORS have constructed a housing affordability index. The index comprises these 3-basic elements: 1. Determine the median home price for the area. Median means that half of the sales prices were larger and half of the sale prices were smaller. 2. Select the prevailing interest rates on standard home loans. Usually defined as a 20% down, 80% conventional home loan, most often using fixed rate loans. 3. Determine the household income level for the area.

Available Supply

The above discussion focused on the TOTAL SUPPLY: the numbers, age, condition, and location, and how these change over time. But this is not the only way of looking at supply! Equally important is to consider that fraction of total supply that is available at any one time. We talked earlier about the TURNOVER RATE, the percent of all owner-occupied units that sell in a time period. It can also refer to the percent of rented units that change occupants, The turnover rate varies with the location, type of dwelling unit, form of ownership, etc. Some apartment buildings that are close to a college find some units turning over every semester. But some owner-occupied homes may have the same occupants for many decades! The turnover rate also varies over time. In deep recessions, as well as in boom times, the turnover rate often increases! Because of turnovers, there are always some units that are vacant, either for rent or for sale. A vacant unit may stay vacant for a while, if it's being renovated, or if the owners are in a dispute of some sort. Sometimes more units come on the market than there currently are buyers or renters. Brokers, appraisers, and lenders keep a close eye on the inventory of homes and condos for sale. Usually they compare the number of homes for sale with the current RATE of sales. If a particular neighborhood is currently seeing 17 house sales close escrow in the most rent mont, but there are 78 homes for sale, then it would take 4.6 months to sell the remaining inventory (78 ÷ 17 = 4.58). This analysis is widely reported, because the number of properties listed on the local MLS is readily available, as is the number of recently closed sales. Data on the total number of vacant rental units is less available, and most areas have no data at all on the number of units that were rented up in any recent time period. Another problem is that the sales rate usually changes with the seasons, loan interest rates, and buyer confidence. So, after 3-months, the monthly sales rate might be cut in half, or double! Also, over the 3-months, no new sellers might list their homes, causing the number of listings to decline and buyers to start worrying. Or, there might be a huge number of new listings over the 3-months! These issues have complicated housing market analysis, especially since the 2007 credit market crisis. Figure 9.8 (Page 252) shows monthly data from First American Core Logic for 2007-2009 (first 6-months) on three measures of how foreclosures might impact unsold home inventories. ("REO" refers to home that have been foreclosed and are now bank "Real Estate Owned.") Particularly disturbing is the massive increase in the percent of loans that are over 90-days delinquent, contrasted to the low level of REO properties. There have been a series of foreclosure moratoriums, which caused lenders to delay the final foreclosure steps. And the government has encouraged lenders to modify loan terms to reduce the rate of foreclosures. The problem is shown by figure 9.9 (Page 253) showing the Standard & Poors/Case-Shiller Home Price Index for 20 major cities and the San Francisco metro area. The huge increase in prices, from 2000 to the peak in mid-2006, means that many families have big loans. They either purchased at these high prices, or else they refinanced their loan and took cash out. But, the big drop in prices since then means that, by the end of 2009, many home owners owed more than their house was worth. No one can reliably predict what homeowners who are "underwater" (owing more than their home's value) will do. But it's clear that this is a major issue for future housing markets, and for appraisers, lenders, and brokers who try to analyze them! Figure 9.10 (Page 253) shows how this "shadow inventory" of possible homes for sale has increased since 2006.

* The Demand For Housing

The demand for housing should be studied from two points of view. The first view looks at total demand, or the numbers of housing units needed in a given market. The second (and perhaps more important) view looks at the composition of housing that is in demand. Housing composition means the mix of unit size, age, location, and condition, and whether the units are intended for owner occupancy or for rent. Housing analysis involves both NUMBERS and PREFERENCES! Another way of looking at the demand for housing is to tie it to time. Are we interested in studying demand in the short run--where is it this month, for example--or are we considering total demand over a longer time, perhaps the next 5-years? Both views are quite important, but usually to different parties. For the broker, appraiser or home owner, facing a question about a particular property at a point in time, the major concern is with the market at that instant! But for city planners, traffic engineers, investors, loan underwriters, and others reviewing the big picture, the longer time period is the concern. The appraiser might be working on an employee relocation assignment, perhaps one where the client wants an estimate of market value a year from now! There are just as many circumstances where we need to understand the long-term as for the short-term view! The demand for housing is influenced by three major factors: 1. Population and demographics 2. Effective income and related credit issues 3. Tastes and lifestyles. EACH can have short-term and long-term effects on the demand for housing.

Population

The most important influence on housing demand is the size of the population. Housing is for people, and their presence or absence affects housing demand. Major growth in community population, as in central Detroit, causes a decline in demand for housing. The structures are still there, so some might be abandoned and sit vacant. The economic definition of a "ghost town" is supply with no demand! The causes of population change are many. Most start with changes in the number of jobs at that location. The decline in housing demand in Detroit has its roots in the decline in basic employment in the auto industry.

Divorce Rate

The rate of divorce in the United States is another aspect of demography, and influences housing demand. With no increase in population, an increase in the divorce rate will create need for additional housing units. If the divorced person remarries, the additional demand is temporary; if the person decides to remain unmarried, the demand increase is permanent. Uncoupling by unmarried people living together can have the same result as a divorce. In high divorce rate states, such as California, the divorce rate is a major factor contributing to the turnover rate, the percentage of housing units which change occupants each year. The over-all impact on total housing demand is relatively small.

Income and Financing

The second of the three major items influencing housing demand is income. People who lack money can't afford adequate shelter, however great their housing needs. When people have a housing need, and if their income is sufficient to pay the costs they create an EFFECTIVE DEMAND for housing. Because the housing market today is totally based on loans, the availability and cost of loans are major issues in demand. For some people, too many bills to pay or mouth to feed restrict the money available for housing. When analyzing income as a factor in housing demand, one focuses on that portion of people's total income that is available for housing use. There are many different measures of income. Generally, we start with total income, which includes wages, received interest, dividends, capital gains, cash awards, child support, and alimony. Gains that are only on paper, and promised payments, are usually omitted. Mostly commonly, the next level is disposable income, which USUALLY is defined as gross income, less all income taxes. Sometimes, this is considered the same as one's net paycheck. The term "real" means that the dollars have been adjusted to eliminate the change due to inflation or deflation. "Per capita" tells us that this is the average income PER PERSON, which adjusts for any change in population over the time period in question. Generally, the next income level is referred to as discretionary income. This is usually defined as gross income, less income taxes, and less necessary expenses. Clearly, "necessary expenses" is hard to define, so there is some confusion about it. What is generally understood to be included are: rent or mortgage payments, utilities, food, work, transportation, and other necessary expenses. These might include minimum credit card payments, child support, and alimony. Income levels, like population, affect not only total housing demand, but also the composition of that demand. Demand composition means the mix of types of housing that is in demand. People with higher incomes often leave rental units, and buy homes or condominiums. People with lower incomes sometimes find they must share housing accommodations with their parents or other people, which is called doubling up.

Demography

The sheer numbers of people are not the only influence on the demand for housing. A second population issue is demography, which is the breakdown of the population according to age, sex, occupation, income level, and other variables. Demography is important, because people of different demographic characteristics have different housing needs. Example. Young children live with their parents. By the time they are 18 or so, some have moved into their own apartments. But culture plays a role--some stay at home until they marry. By age 30, the great majority have moved into a housing unit of their own. As they age, their housing needs continue to change! Two neighborhoods with the same total populations, but with different demography, will have different housing needs. One neighborhood might contain mostly older, retired people, living in apartments. Some might be couples and some single people. Only a few would have any children living at home. Another neighborhood might be made up of single-family homes, occupied by middle-aged, middle-income families. The second neighborhood would have far more children, and the average family size would be larger. Although the population is the same in both neighborhoods, the number of housing units would be less in the second, as a result of the larger average family size. The neighborhoods would also differ, in terms of the need for more or fewer schools, shops, and public transportation.

Evaluation of Supply

The supply of housing at any FUTURE date will consist of the units that existed at a prior date, minus those units lost as a result of fires, demolition, and conversions to other uses, and then increased by buildings converted to housing and by new construction. Example: Changes in Housing Stock, Sometown 21,214 Existing stock, end of previous year - 137 Demolitions during current year = 21,077 - 7 Housing units converted to other uses = 21,070 + 4 Other units converted to residences = 21,074 + 38 Added units to existing structures = 21,112 + 393 New Construction = 21,505 Existing stock, end of current year

Changes in Taste

The third MAJOR FACTOR influencing housing demand is taste or lifestyle. The most basic need for housing is a roof and four walls, to provide shelter from animals and the elements. As people seek a better standard of living, they respond to their own desires or their friends' expectations of what life ought to be. Thus, where people choose to live is not only a function of income and credit, but also of personal preference. For example, some people choose to place most of their wealth in their home, whereas others might choose a modest principal residence, plus a getaway vacation home. Still others decide to spend the minimum on housing, and use the extra money for investments, leisure, or hobbies. Their confidence level also plays a big part in this decision!

Choosing Housing Type

Think back to what you know about the housing units you know that are over 100-years old. There were detached single family homes, in a range of sizes. There were attached row houses, some just two or three units, and others entire blocks. There were "flats", usually a duplex or triplex, with one unit per floor. And there were larger rental apartment buildings. Only a few condominium or cooperative buildings existed, mostly in the largest cities. Today, there are some additions to that mix. There are many more condominiums, in configurations from duplex buildings to tall towers. Arguably, "zero-lot-line" designs are new. Buildings with a mix of residential and commercial uses existed in large cities then, but now are much more common. New mixtures are found: hotel/office/condo, for example. And sometimes, new names have emerged for old designs--townhouse for row house, duette for duplex. But there also is more variation. Large subdivisions of similar homes were common in the 1950s and 1960s. Now, most large developments have a wide mix of housing types and of unit sizes! These reflect buyer demand for more variation, more choice, and more flexibility in how we house ourselves.