Friday, February 20, 2009

Real Estate Supply

There seems to be a commonly held idea that it is population increase that is the primary driver of housing construction in America. For example in the New York Times today I ran into the following statement:

Consider housing starts, which have fallen to their lowest level in 50 years. That’s bad news for the near term. It means that spending on construction will fall even more. But it also means that the supply of houses is lagging behind population growth, which will eventually prompt a housing revival.

This idea while seemingly common sense is actually rather off base. The median sized home has more than doubled in size in the past fifty years, at the same time as the median household size has decreased by about one person. We are living in a lot more space than ever before. The times when the normal family lived in a one room farm house are long gone. This means that it is how much space we want to pay for that will judge how much housing we need. Predicting how much that will change is a far more tricky problem than looking at population growth, and assuming we will need more houses. What if we just decided we wanted to work less hours, and live in smaller houses?

Another way to look at it: It is quite likely the United States population will never double again. Right now it has something like a 72 year doubling time, and almost all of that is from immigration. The birth rate is at the replacement level, and if what has happened in Europe is any guide it is as likely to drop below replacement level as go above it. If however the population does double at the current rate, and we didn't build another house for the next 72 years, just maintaining what we have, than there would still be enough housing for us all to have the amount of square footage that the average American had in 1950. Because population is likely to never double a second time just maintaining what we currently have, and replacing homes destroyed by disaster or neglect, we could get by just fine without ever having to build another home.

Of course, since homes seem to have turned into little more than status symbols we might just decide we can't get by without 5000 square foot homes. Still, I feel safe in saying that Americans would be no happier if we doubled the size of our homes, than if we halved it.

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