Analyzing housing demand in the United States with a focus on comparative analysis of regional housing demand in the four regions.

Author:Broady, Kristen E.
Position:Report
 
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  1. INTRODUCTION

    For many families in the United States, owning a home is the greatest asset and the greatest expense. Owning a home has become a part of the "American Dream". Home ownership has helped shape the physical landscape and supported the economic security of the United States over the last 30 years. The importance of housing in the current economy is evidenced by the reliance by many economists on the quarterly housing start index, which is a measurement of the total number of houses which have commenced construction within a specific quarter.

    Many factors influence the homeownership decision. These include, but are not limited to sales price, employment, income, interest rates, and inflation. Population growth and characteristics also influence housing demand. Housing needs and preferences are shaped by the characteristics of the individuals in the population, particularly by age, ethnicity, and family status. (Hamilton, 2004) These factors along with income and sales price differ greatly among the four regions of the United States, Northeast, Midwest, South, and West.

    The definition of affordability with respect to housing, according to the U.S. Department of Housing and Urban Development, is for a household to pay no more than 30 percent of its annual income on housing. Families who pay more than 30 percent of their income for housing are considered cost burdened and may have difficulty affording necessities such as food, clothing, transportation and medical care. Housing costs considered in this guideline generally include taxes and insurance for owners, and sometimes include utility costs. When the monthly carrying costs of a home exceed 3035% of household income, the housing is considered unaffordable for that household. Where the demand for available housing exceeds supply, a large amount of the housing stock is not affordable to much of the population. Demand can be measured in terms of the costs for housing, housing type and location for housing. This paper will analyze the determinants of national and regional housing demand and help determine which regions have been the most affordable during the 25 years between 1975 and 2000.

    Mortgage rates influence prospective buyer's ability and desire to buy a home. The mortgage rate determines the monthly mortgage payment of borrowers and therefore their ability to meet debt-to-income standards used by mortgage lenders. Rates also affect ownership costs and the desire of individuals to become homeowners. A change in mortgage rates affects the number of potential homeowners. A shift--generally a reduction--in mortgage rates of roughly 2 percentage points changes the percentage of households that can buy a house by around 50 basis points. A mortgage rate reduction can increase the homeownership rate in two ways. First, a reduction can make it feasible for a household to qualify for a mortgage by lowering the monthly mortgage payment and allowing the household to meet the originators' debt-to-income standard. In a standard mortgage, monthly mortgage payments cannot exceed 28 percent of monthly income. Total debt cannot exceed 36 percent of income. Second, a reduction can induce a household that has already qualified for a mortgage to decide to own instead of rent. (Feldman).

    Many economists have studied the fluctuations in the housing market, but actual determinants of housing demand have not been determined. Further, those determinants have not been evaluated and compared on a regional basis. This paper attempts to evaluate the determinants of housing demand in the nation and compare them to determinants in the four regions of the United States.

    The variables considered will include the number of homes sold in the region, regional average household income, regional unemployment, regional median sales price, national average prime interest rates, national inflation and national population. A population trend analysis is conducted to evaluate the effects of population growth on housing demand in the regions.

    Many studies have evaluated current housing demand (Green & Malpezzi 2000), racial demographics and housing demand (Bajari & Kahn 2005), and home pricing trends (Green & Hendershott 1996). There have not been many which provided a historical view of the determinants of housing demand. The purpose of this paper is to provide a historical look at housing trends in the nation and the four regions, identify the determinants of housing demand, and compare these determinants over time in the nation and the four regions.

  2. LITERATURE REVIEW

    This paper will review literature from a variety of sources concerning the determinants of national housing demand and demand in the four regions of the United States including historic demographic trends as well as various quantitative housing data in order to summarize the influence of socioeconomic trends on housing demand.

    Myers and Vidaurri (1996) review the nature of changing demographics which affect housing demand. According to the article, the rates of immigration and ethnic change in some coastal cities differ greatly from those in the nation's midsection. Age effects are more universally distributed across the nation, however, and the dispute over interpretation applies equally everywhere. For this reason, and because it is impractical to summarize data for each local market, this article addresses data for the entire nation. According to the article the real demographics of U.S. housing revolve around the aging of real people in cohorts, not cross-sections at a moment in time. The cohort trajectories lend themselves to projection into future decades better than do the age cross-sections that have traditionally been used. The clear implication is that the baby boom generation will not experience the loss in housing demand that had been feared. The article concludes that households will continue to invest in their housing to make it more comfortable as their needs change. Thus the large baby boom generation should continue to wield a positive impact on the housing market, rather than a negative one. (Myers, Dowell & Vidaurri, 1996)

    In "Age, housing demand, and real house prices", Green and Hendershott determined that real house prices are directly related to the willingness of households to pay for a constant-quality house. They found that changes in the quantity of housing demanded affected real prices to the extent that the...

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