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Friday, October 30, 2009

Housing and the September 2009 New Residential Construction Report

According to the U.S. Census Bureau and the Department of Housing and Urban Development, single family housing permits indicate that future construction activity will fall 28% nationally as compared to September 2008. The data also predicts a huge 74% drop since construction peaked in January 2006. Economists generally agree that annual demand for new housing units is somewhere around 1.8 million. Some economists say that 2 million units are required annually, while others think that the actual demand 1.5 million is. Here's part of how they come up with these numbers. The primary drivers of housing unit demand are new household formation and housing unit destruction. We regularly hear that new households, on average, form at a rate of 850,000 per year. Housing destruction is composed primarily of units destroyed by fire, flood, natural disaster and urban renewal, and is generally considered to be around 750,000 units per year. Fires alone account for almost 450,000 homes destroyed annually. Just watch the news any evening in Atlanta, and you are likely to see or hear about apartment or house fires. Adding just these two demand measures yields a 1,600,000 annual unit demand.



As the U.S. population has continues to rise, just as it has for the last 50 years, new housholds should be forming. For the last three years, new households have not been forming at a normal rate. Single people are moving in with each other, young adults are returning to live with their parents, and immigrants are entering the country at a much slower rate. Housing units, however, continue to be destroyed on a ongoing basis. This year alone, more housing units were destroyed by the floods in the Atlanta Metro Area this year than were permitted through September. Subtract the additional units destroyed by fires (usually the largest part of the destroyed number) and urban renewal, and Atlanta should be with a shortage in housing units. Just as over the last 50 years housing has been cyclical with booms and busts occuring irregularly, we may be setting up for another housing boom, when the next generation begins to form households and destroyed units are replaced.

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