Don't be surprised if housing economists start placing the same warning on their forecasts as mutual fund prospectuses: Past performance is no indicator of future events.
Economists rely heavily on historical trends when they predict what's to come, and among those trends, one of the most important is the household formation rate. Between 2000 and 2007, the usual combination of marriages, divorces, immigrants, and kids graduating from college and the like helped create roughly 1.2 million new households per year.
That number is a big reason why economists have long said the U.S. economy can easily support as many as 1.7 million housing starts each year. So if that's the case, why are we struggling at an annual rate of 600,000? In part because the recession is holding back household formation.
The Joint Center for Housing Studies (JCHS) at Harvard University pays particularly close attention to this issue in its latest edition of its State of the Nation's Housing report. It found that between 2007 and 2010, the household formation rate dropped to 500,000 per year.
JCHS expresses uncertainty as to when demand would revive, citing a number of factors that can easily upset predictions. An improving economy, bolstered by lower unemployment rates, may help to drive a housing recovery, it says, but likewise a continually sputtering economic engine could keep people from moving out into their own homes.
Echo Boomers–people born since 1985, collectively a bigger group even than Baby Boomers–are moving into their 20s and beginning to reach an age in which past generations historically started forming households, JCHS notes. But it says this generation hasn't been forming households at the same rate.
Poor economic conditions may be a turn-off for many first-time homebuyers, who have historically driven growth in the new home market, the center says. These conditions kept them from the top of the market and then scared them off with difficulty acquiring financing and falling home values.