Harvard Housing Study Predicts
Continued Industry Prosperity

By PATRICK BARTA
Staff Reporter of The Wall Street Journal

For some time now, economists have wondered whether the nation's housing market is a bubble waiting to pop. Commanding their attention: annual price-gain percentages in the double-digits, for at least the past five years, in many locations.

Now, the Joint Center for Housing Studies of Harvard University suggests that while a reversal in home prices is possible, it would probably be short-lived.

The Harvard center's report offers a demographic look at household creation, a high level of which is vital for the health of the housing market. The center's yearly "State of the Nation's Housing" report, scheduled for release Tuesday, predicts that the number of U.S. households will increase 22.6% to 129 million in the next 20 years. That translates into about 1.19 million new households a year, only slightly lower than the 1.26 million new households created a year in the 1990s, a great decade for housing that included several years of record sales.

Although it is possible there could be a hiccup in the housing market in the short run, "it is clear that the underlying demographics will undergird the housing market" over the next decade and beyond, says Nicolas Retsinas, director of the Harvard housing center.

Some economists have warned that the pace of household creation will slow sharply in the years ahead, as baby boomers age and settle permanently into their homes. That, so far, has proved to be a misplaced fear, as boomers instead have opted to trade up to pricier houses and snap up second and third homes for vacations. Meanwhile, a surge of immigrant buyers over the past five years, made possible by easier mortgage terms, has made up for any shortfall.

The Harvard study expects these trends to continue and says tight supply should further support home-price growth. Builders, the report says, will need to add 1.7 million new homes and apartments a year to keep up with the demand. (The number is greater than the annual rate of household formation because it includes replacements for old homes that are destroyed, as well as demand for vacation homes.) In the past three years, builders have been adding only about 1.6 million new homes a year, in part because of constraints on land use that have made it harder to find places to build.

Changing Outlook

To be sure, some factors could change the optimistic outlook. One is the uncertainty surrounding the manufactured-housing industry, which fell apart at the end of the 1990s amid a wave of foreclosures. Long term, some analysts expect these sales to pick up as lower-income families buy homes rather than rent apartments. If they do, "it will come primarily out of the hide of the single-family market," reducing the demand for traditional homes, says Mark Zandi, an economist at Economy.com in West Chester, Pa.

Affordability is also a big issue, even though the cost of owning a home actually decreased last year because of low mortgage rates, the Harvard report says. With rates falling to 30-year lows in the fall, the monthly after-tax cost for a buyer of a typical home last year fell $22 to $821. But consumer-debt levels remain extremely high, and the low rates may have only temporarily masked high prices. If mortgage rates go up substantially in the next few years -- perhaps above 9%, from below 6.75% for the 30-year fixed mortgage rate now -- giant portions of the population could find themselves unable to afford housing.

Fate of Immigration Boom

Finally, it's unclear whether the immigration boom will continue, especially if the U.S. tightens its borders further in response to terrorist threats. But the Harvard study argues that a sizable drop in immigration might not affect the market for a long time, since there is usually a long lag between the time immigrants arrive and when they achieve the economic stability to buy a home.

The Harvard report also highlights a surprising occurrence in last year's market specifically: Sales in the Midwest were stronger than the rest of the country, offsetting weaker growth or outright declines in states along the two coasts. Mr. Retsinas says that is partly because many Midwestern states weren't hit as hard by recession as New York and Northern California.

The Harvard center's report was funded by the Ford Foundation, as well as numerous housing-related companies and trade associations, including Fannie Mae, the National Association of Realtors and the Mortgage Bankers Association of America.

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