RENTAL MARKET UNDERBUILT IN THE 50'S ... The low rate of rental building during the 50's probably represented underbuilding in the market. There is most certainty a part of the population who by preference, mobility demands, or financial assets, will always prefer apartments. Part of this segment is no doubt a luxury market and the low building rate of the 50's probably forced this segment to remain mostly in older buildings, providing a natural backlog for the construction of new luxury units.

GROWTH OF 1-PERSON HOUSEHOLDS ... A large portion of our household growth in the 50's came from one person households and others headed by unrelated individuals. These people normally are doubled up, either with relatives, friends, or in rooming houses, but economic prosperity helped to permit a new level of freedom of choice in housing accommodations. This is evident at all age levels, but a growing number of widowed persons among the aged appears as the largest contributor. In particular, economic factors such as social security and the trend toward increased pension provisions is permitting more of the senior citizen group to maintain separate households.

SLOWING OF INFLATION ... During the inflation of the 50's a number of persons and families who ordinarily might have been restricted to the rental housing market because of their mobility undoubtedly found their way to home ownership as a profitable substitute for renting. In essence, it was possible during some periods to live in an owner-occupied home for short periods from one to three years and dispose of it at a profit or little net loss. Inflation appears to be slowing down which would tend to take some of these household units out of the ownership market.

A SLOWDOWN OF INFLATION MAY ALSO BE STIMULATING DEVELOPMENT OF SPECULATIVE HOLDINGS As inflation wanes, a speculative real estate holding becomes less and less profitable, as a source of gain. It then becomes increasingly necessary to develop the property for its maximum permissible use in order to realize the market values currently achieved. Speculators may either develop themselves, or sell to other developers--but the opportunities to sell to other speculators must inevitably diminish if inflation slows down.

SOME OTHER FACTORS ... Such factors as the gradual breakdown of urban transportation systems, the need to consolidate recent urban expansion with some higher density development, the trend toward apartments in the suburbs as communities seek to broaden their tax base are also contributing factors to the boom. Some others would include the need to distribute high land costs through higher density development, the stimulus of government urban renewal programs and private renewal, the broad range of new government insurance programs in the multi-family housing area, etc. There may also be a tendency for communities to reduce the zoning, planning and code obstacles to higher density development-though there is as yet no indication of any similar tendency which would be favorable to providing smaller home sites for small low-priced 1-family units. This need appears urgent if the housing market is to be broadly served. One more contributing factor which should be mentioned is the growth of foreclosures on 1-family houses. Despite the abundance of mortgage capital, the rising foreclosure trend has probably made lenders more wary of 1-family home loans and may be raising barriers to credit qualifications. This trend, if true, could be an added stimulus to diverting part of the flow of mortgage capital to the apartment markets.

*

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BEC SURVEY SHOWS ARTIFICIAL SUPPLY STIMULANTS AT WORK... A survey of the NAHB Builders' Economic Council in the spring of 1963 suggested that artificial stimulants were a significant factor in the current rental housing boom. This does not necessarily permit a conclusion that rental housing supply will exceed the demand for it. But it does suggest the need for very careful evaluation of both supply and demand to assure that they do not get badly out of balance.

Details of the BEC views on the rental housing market are contained in the full survey report. The table below summarizes only a part of the survey results.

There are no doubt a number of biases in this type of question, and its suggestion may well be exaggerated. It is presented here for only the insight it appears to provide as to the nature and rank of the factors behind the boom.

An implied suggestion here is that--when supply stimulants not directly related to demand are combined with the long lead time involved in putting apartment buildings on the market, the danger of substantial overbuilding would appear to multiply. The fact that 72% of the BEC builders felt that overbuilding was occurring in their areas, combined with the indications of continued rise in multi-family building nationally add some seriousness to this consideration.

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PART III PROJECTIONS OF FUTURE MARKETS

NEW CONSTRUCTION FOR THE 60s ESTIMATED AT 16 MILLION ... In 1959, NAHB made a projection of new construction for the 60s of 16 million units. While we are at the moment running behind schedule during the first three years of the decade, the projection still seems reasonable and attainable for the decade as a whole. New data, however, suggests changing some of its components. There are three separate areas of housing inventory changes to be considered in any projection of new construction: (1) the net additions to the occupied inventory - in other words, net new household formations; (2) the number of units which will be removed from the inventory and require replacement, due to such causes as demolition, fire, flood, abandonment, net changes to non-residential use, etc.; and finally, (3) net additions to the vacant inventory. A set of high, median, and low projections of these three components are presented in the table below.

1/

2/

In addition to the normal vacant inventory, gross vacant units
will include second homes, seasonal housing, habitable units
not offered on the market for one reason or another, and
substandard units which are nonetheless offered on the market.

High and low projections roughly approximate series A and B
projections by Bureau of the Census - revised April 1963.

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AGE MIX A KEY FACTOR IN RENTAL DEMAND... There are a wide variety of factors which could be considered in projecting rental housing markets. But it appears that the age mix question not only overshadows the rest of the issues, but is probably closely related to many other issues; for example, to the distribution of financial assets and income, and to mobility characteristics. Further, it must necessarily be assumed that over the long run, supply forces will balance out. (The circumstances where they would fail to balance out do not lend themselves to prediction.)

An examination of home ownership rates in different age groups reveals wide variations in the rates among the various age groups. (See Table VII) If we could expect the factors that determine the net increase in households and the home ownership rates--by age group--for 1970 to remain constant, it would seem a simple matter to predict the decade's markets for rental housing. The fact of the matter is that they don't remain constant--and most importantly only slight variations in assumptions, all of them reasonably defensible, produce wide variations in the results.

Source:

NAHB estimates based on incomplete data from Bureau of the Census

EXPERIMENTAL PROJECTIONS VARY WIDELY ... There are usually a variety of defensible assumptions to consider in making any projections. Experiments with five different sets of assumptions on homeownership rates within each age classification produced extremely wide variations in results. At the lowest extreme, assuming a return to 1950 homeownership rates, 8.7 million of the expected 10 million increase in households would be in rental units. At the highest extreme, assuming 1970 rates would increase over 1960 rates by an amount equal to the increase from 1950 to 1960, less than half of a million of the 10 million household increase would go to rentals. However, the assumptions which in our final judgment appeared most reasonable resulted in an estimated net addition of 5 million homeowner households and 4 million renter households.

Simply stated, the set of assumptions finally chosen, views homeownership as an accumulative process over the life cycle. Thus, 1970 rates for any one age group start with the homeownership already acquired by that group when it was 10 years younger. This base then becomes more important than the homeownership experience of a different group of the same age in past periods. (Some details of the method are provided in the appendix.) The table below shows the comparative homeownership rates in each age group, as projected for 1970.

Table VIII

PROJECTED HOMEOWNERSHIP RATES FOR 1970 AND COMPARATIVE RATES FOR 1950. 1960

10 MILLION GAIN IN HOUSEHOLDS INVOLVE NEARLY 35 MILLION HOUSEHOLD CHANGES ... We began this decade in 1960, with 53 million households in the United States in which 33 million were owner-occupied and 20 million renter-occupied. But during the decade, 3 million 1960 owners will become renters, and 6.7 million 1960 renters will become owners. Another 7.3 million 1960 households will be dissolved--most frequently in the higher age brackets, by death or by the process of the elderly moving in with relatives or into nursing homes, etc. The dissolved households will include a loss of 5 million which were owner households in 1960 and 2.3 million which were renter households. But gross new households formed will apparently run about 17.3 million--including 6.8 million new owner households and 10.5 million new renter households. Nearly 14 million of these will be headed by persons under 35 years of age. The net of all of these components of change will be an increase of 10 million households including 5.5 million net gain in owner households and 4.5 million gain in renter households. The table on the next page shows these components and how they compare for the 50's and the 60's.