On Monday, President Donald Trump called the bipartisan housing bill that cleared Congress last week with huge majorities "a yawn." Might he end up being proved right, despite legislators' outrage at his stalling of the law?
The Mortgage Bankers Association (MBA) is a big fan of the 21st Century Road to Housing Act, which we wrote about last week. The new law is intended to boost residential construction, delivering new homes nationwide, while also addressing some affordability and funding issues.
However, this month, the MBA published a new report, Implications of a Persistent Slowing in Housing Demand, which suggests that in just nine years the U.S. might have too many homes. If that happens, it will likely be down to mass deportations and fewer new immigrants, along with a slowing rate of reproduction among citizens that quite soon could mean deaths outnumber births.
What the MBA Report Says
The MBA acknowledges that guesstimates of the current national housing shortfall range from 1.5 million to 7.3 million units. So, the crisis is genuine.
However, the MBA's report says, "Looking ahead, demographic trends are weakening the foundations of housing demand. Household formation is expected to slow over the next decade due to population aging, low fertility rates, smaller younger adult cohorts, and reduced immigration.
"Aging Baby Boomers are unlikely to flood the market with inventory, but home transfers will moderately add to supply over time," continues the report. "If construction remains elevated, supply growth could outpace demand growth, pushing home prices lower. These trends carry meaningful implications for homeowners and the mortgage industry, including risks to origination volumes, borrower equity, and credit performance."
The report estimates that the U.S. could add between 10.6 million and 14.6 million housing units during the decade ending in 2035. It's if those construction forecasts and demographic changes come true that an oversupply could emerge in nine short years.
Why the MBA Report Might Be Wrong
Looking into economic crystal balls is always fraught with danger. The MBA seems to assume that current trends will continue for the next nine years.
But how likely is that? It's easy to imagine several scenarios where the economy shifts dramatically over such a period.
For example, some believe that we're currently seeing a stock-market bubble driven by AI and its adjacent industries. If that bubble bursts, we could see a recession that's at least as damaging as the one that followed the 2007-08 credit crunch.
It's vanishingly unlikely that builders would construct homes at the same pace as now when purchasers couldn't afford their products. And even if there is no recession, one would like to think developers keep an eye on housing markets and would slow or even stop building before creating a glut.
Meanwhile, population trends are uncertain. In January, the Congressional Budget Office (CBO) said, "Starting in 2030, annual deaths exceed annual births, and net immigration accounts for all population growth."
Given the link between increasing national prosperity (including gross domestic product (GDP)) and population growth, can future governments afford to be as restrictive about immigration as the current one is? If not, demand will be buoyed.
This isn't intended to be critical of the MBA's report. All economic forecasting is based on models that require assumptions.
And for all we know, the MBA will turn out to be spot on. But we think it will be lucky (and we'll all be unlucky) if all its assumptions are correct.
Suppose the Report Is Correct
Anyway, let's hope the report is at least somewhat wrong. Students learn about the law of supply and demand in Economics 101.
"The interplay between these two elements [supply and demand] determines market prices and is essential for predicting economic trends," says EBSCO. "When demand exceeds supply, prices tend to rise, encouraging producers to increase output. Conversely, if supply surpasses demand, prices usually fall to stimulate
sales."
Imagine if a surplus of homes sent property prices and rents sharply downward. Many homeowners would find themselves "underwater," meaning the market value of their home was lower than their mortgage balance. And access to home equity would be drastically reduced.
All this could cause a recession, driving up unemployment, dragging down credit scores, and turning GDP negative. Luckily, plenty of economists believe this is unlikely.
"Housing demand is far from fixed," said one, Joel Berner, a senior economist at Realtor.com®, when he read the MBA's report. "Builders can cut production when sales slow, households can form when housing gets cheaper, and a home built in a fast-growing Sun Belt market does little to relieve scarcity in a high-cost metro hundreds of miles away."
We tend to agree with Berner. Still, let's hope home builders and governments at all levels keep a close eye on housing markets' dynamics.
