Economists: Most New Households Will Rent, Not Buy

Tight credit continues to crimp home sales, experts say.

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With the spring home-buying season heating up, more than a few people will be keeping a close eye on home sales over the next few months.

And expectations are high.

According to recent projections from the National Association of Realtors, existing homes sales could jump as much as 10 percent, making 2012 the strongest buying season in five years.

But it all depends on this concept of "pent-up demand" that economists and industry experts throw around, the idea that faced with a harsh financial environment, many Americans have put off buying or renting a home and have instead doubled up with friends or family members to save money.

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"We think there's significant pent-up demand," says Jed Smith, managing director of quantitative research at the National Association of Realtors. "Longer term, we've been through a major recession and that has delayed family formation."

But as the economy and labor market strengthen, economists expect more of those people who've put off moving out of mom and dad's place to branch out on their own, or, to use the technical term, form households.

According estimates from the National Association of Home Builders, more than 2 million households that were expected to form over the past few years haven't. That's essentially cocked the trigger for housing demand, and unlocking that pent-up demand could be the difference between a housing market that continues to slog along under the pressure of excess housing inventory and one that starts to shake off the debilitating aftereffects of the Great Recession.

But while the raw numbers might seem to indicate a coming windfall for the housing market, reality doesn't always follow raw data, economists warn, especially given the difficulties many would-be buyers continue to have getting a mortgage.

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Also, a closer look at household formation trends over the past several years reveals that the vast majority became renters, not owners, which could punch a hole in the idea that a wave of newly confident prospective home buyers will save the housing market.

"When you have family formation, you probably initially have rental demand," Smith says. "This is a longer-term thing—I don't think we're going to see a rush of marriages resulting in house sales or anything."

The bottom line is the pent-up demand many experts expect to hit the housing market over the next few years will likely not come in the form of a massive home-buying wave. In fact, the homeownership rate could fall even further, as an estimated 70 percent of newly formed households opt to rent instead of buy.

But that's not necessarily a bad thing. In recent months, the government has launched pilot programs to sell foreclosures in bulk to investment companies that would then convert the properties into rentals, essentially killing two birds with one stone: reducing the inventory of vacant properties and satisfying rental demand.

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"Renters will still absorb housing units," says David Crowe, chief economist at NAHB. "These programs will only work if there are people who want to rent so in some ways it's kind of the two forces aligning themselves—investors willing to buy bulk REO and a group of people arriving on the marketplace who are likely to want to be renters."

The increased demand for rental property will likely push up rental prices, Crowe adds, incentivizing homeownership for a certain segment of renters. And the cycle is complete.

The key factor in supporting existing and future home-buying demand is a healthy mortgage market. As it stands, experts say most factors—high affordability, low mortgage rates—point to an improving housing market, but the still-struggling mortgage market could keep the lid on broader improvements.

"We estimate housing sales could be an extra half million higher if credit were easier," Smith says. "Interest rates are fairly low but, unfortunately, lending standards are too high. That's a demand that's not being met."

Twitter: @mmhandley

Corrected 06/12/12: A previous version of this post misstated Jed Smith's title. He is managing director of quantitative research at the National Association of Realtors.