Goldman Sachs On The Demographic Trend That Could Keep The Housing Market Booming For Years

70s family, baby, dog, parents

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Our big theme these days is the positive tailwind coming from households and household balance sheets.On Sunday we explained the concept of the Balance Sheet Recovery — the idea that releveraging of households will be a positive force for some time to come as the deleveraging reverses.

Today we wrote about the strong signs that actual housing starts/sales will be a major positive contributor to GDP.

It’s actually astonishing how much new housing starts can add to the economy.

Says Deutsche Bank’s Joe Lavogna, in regards to homebuilding…

The year-to-date contribution to real GDP has been 30 bps per quarter. This should increase to 60 bps per quarter next year given the scenario highlighted above. Additionally, higher consumption of housing-related services coupled with the indirect effects from home price appreciation (i.e., wealth effects) could easily raise the housing contribution to one full percentage point. In short, housing could provide a meaningful (and critical) lift to overall economic activity at a time when other growth drivers, like exports, are slowing. 

It’s great that homebuilding has the potential to add 1 full percentage point per quarter, but what will keep homebuilding going?


In a recent note, Goldman economists Hui Shan, Sven Jari Stehn, and Jan Hatzius explained the forces that will drive increasing household starts/homebuilding for the next few years.

They write:

Recent housing market data have been encouraging. Household formation has started to rebound from its post-crisis lows and housing starts have shown notable gains in recent months, surging by 15% in September alone. In light of these encouraging developments, we revisit the homebuilding outlook in today’s comment.

First, we update our model of household formation, which combines projections of the headship rate—defined as the per cent of people who are heads of households—with Census population projections. Our analysis suggests that annual household formation will increase from its current 1.0 million rate to 1.2 million in 2013 and 1.3 million in 2014-2016. The improvement in expected household formation is driven by an increasing headship rate among the young, population growth, and the ageing population.

Second, we use our household formation projections to forecast housing starts in two steps. We first estimate excess housing supply based on a long-run relationship between the number of houses and the number of households. We then link the estimated excess housing supply to housing starts. Our analysis implies that annual housing starts will increase to 1.0 million by the end of 2013 and 1.5 million by the end of 2016.

For those not familiar with the term “headship rate” it basically just means the rate at which individuals become heads of households, something that dropped precipitously during the crisis, as more and more young people lived at home, and immigrants stayed away.

This chart shows how headship rate among 25-34 year olds really collapsed during the crisis, but is now rebounding back towards pre-crisis trends. Goldman expects the direction to keep going up.

headship rate

[credit provider=”Goldman Sachs”]

Here are Goldman’s headship projections:

headship rate

[credit provider=”Goldman Sachs”]

So ultimately, consistent with growing headship rates among the 18-34 demographic (and only slowly declining rates among the others) Goldman sees a solid basis for more household formation and more starts.

The potential to add to GDP is significant.