U.S. Housing Demand: The Foundation Seems As Solid As A Brick

In the wake of rising mortgage rates this year, there's plenty of reason to think that the peak in the housing cycle is behind us. Indeed, mortgage applications have been slipping since the winter, and builders recently reported that buyer traffic has been slowing.

Nonetheless, the housing market is proving surprisingly resilient. And new demographic data suggest that underlying housing demand could stay robust through the decade and beyond.

Since September, for example, single-family starts have hit an average 1.22-million-unit annual clip--higher than such starts in any year since 1978. Multifamily starts have also accelerated recently and are running at more than double their year-ago pace. And new- and existing-home sales in May posted double-digit increases over May, 1993.

"Although some consumers have chosen to delay purchases due to higher rates," says Robert H. Elrod, president of the National Association of Realtors, "many others have brushed off rates because they are intent on buying a home."

The industry has also been heartened by unexpectedly high immigration. According to the Census Bureau, the U.S. population in the 1990s will grow by some 27 million, rather than the 17 million previously projected (and over the next two decades by an additional 25 million above earlier projections). That's the highest population growth in four decades (chart).

Meanwhile, housing analyst Barbara Allen of Donaldson, Lufkin & Jenrette Securities Corp. points out that housing affordability is still at a 20-year high despite the uptick in mortgage rates, and consumers now have their pick of the greatest variety of mortgage arrangements in history. "Many buyers are now switching to different types of adjustable-rate mortgages," she notes.

Even if the housing market were to soften for a while, its impact on economic growth is likely to remain strong. On average it takes six months or more from the time a start is announced to the end of construction, and that's usually followed by heavy spending on furniture and other items.

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