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By Robert Johnson, CFA and Jeremy Glaser | 03-19-2014 11:00 AM

Will Housing Growth Move Out of the Basement?

While demand for multifamily homes surges, changing demographics have kept the single-family market near the bottom with ample room to grow.

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. Are demographic shifts creating a structural change in the housing market?

I'm here today with Bob Johnson, our director of economic analysis, for his take.

Bob, thanks for joining me.

Bob Johnson: Great to be here today.

Glaser: Let's talk about some of the bull case for demographics in housing. We have obviously had some shaky numbers recently. Maybe some of that's weather-related; maybe some of it's not. Could you walk us through, why you think housing might be a driver of the economy in the coming years?

Johnson: Sure. One of the key things I look at is that housing historically has averaged 4.5% to 5% of GDP, and that includes new homes, existing homes and remodeling. Right now that's running just around 3%. Like I said, it usually runs 5%. It's been as high as 7%. So we have got a lot of runway room in front of the economy that way, just in terms of percentages.

Then focusing a little bit more narrowly on the new-home market, housing starts are running about 900,000 in the latest report that we got today. And the long-term average there is more like 1.5 million starts, and again, it has been as high as 2.2 million home starts. We have a lot of room for improvement, and that's even given that the population has increased during that time over the years that those averages were formed. So that's some long-term good news for the housing market.

Glaser: How about household formation, though? Certainly it declined a lot as kids maybe stayed in their parents' basements for a little bit longer than they hoped. Are you seeing that to start to turn around?

Johnson: Well we are seeing the formations pick up a little bit. And again as you pointed out, it is the kids moving out into their first apartment from the parents' basements, and it's also some baby boomers retiring and moving back, as well. So, those are both trends that are changing the dynamics of the market a little bit.

Glaser: How about the divorce rate? Is that something you think impacts the housing market in a major way?

Johnson: Absolutely. I think because you couldn't sell your home before, people were divorcing in place so to speak: being divorced and living in the same household. Obviously that's a very uncomfortable situation. Now that home prices have come up and people have been able to sell their homes, again, that's something that pushes up the number of households, which means demand for housing. That's certainly a positive.

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