Happy Holidays from CMPS!

There are two major reasons why house prices are poised to go up over the next few years.

#1 - Increase in Population = Increase in Demand
The population of the United States has grown by an average of 1.27% every single year since 1900. At current population levels, this means that we are adding about 3 million people to our population every year. As our population grows, we have about 1.3 - 1.5 million new households that are formed each year. These can include people who graduate from college and enter the work force, and adults who are currently living with their parents that decide to move out on their own.

Over the last 30 years, the average growth in new households has been about 1.4 million each year. Of course, these people will need a place to live.

In fact, the National Association of Realtors estimates that up to 40% of all home buyers in today's market are purchasing their first home - a perfect indication that this segment of the marketplace will continue to thrive even in the midst of an economic downturn.

The growth in population isn't the only thing that will increase demand for new housing. In fact, approximately 300,000 housing units are demolished each year. This is primarily due to functional obsolescence because buildings become old and outdated. This means that the demand for new housing is about 1.7 million new units each year in order to replace the demolished homes and house the new households that are formed. Okay; so now that we understand the demand for housing, what does the supply look like?

#2 - Less Building = Decrease in Supply
It's no secret that home builders are struggling in this economy. In fact, the number of new housing units being built went from a peak of 2.1 million in 2005 to less than one million in 2008. New housing starts for 2009 are also scheduled to come in below one million as the market continues to work off the excess supply of housing that was built during the last few years. In fact, here's an interesting breakdown of new housing starts since the year 2000:

• 2000 = 1.6 million new units
• 2001 = 1.7 million new units
• 2002 = 1.7 million new units
• 2003 = 1.9 million new units
• 2004 = 2.0 million new units
• 2005 = 2.1 million new units
• 2006 = 1.8 million new units
• 2007 = 1.3 million new units
• 2008 = less than one million new units
• 2009 forecast = less than one million units

As you can see, from 2000 - 2002, the supply of new housing units each year was just about right in order to meet the demand of 1.7 million as outlined above. However, things started to get a bit out of whack with some oversupply in the market between 2003 and 2006. Home values went into decline from 2007 - 2009 as the market started working through this over-supply.

However, sometime during the next 12-24 months, the oversupply of housing units will be completely absorbed due to the demand issues that we outlined above. In fact, if the trend continues, there could even be a housing shortage at some point in the next two years unless home builders start building new units at a much quicker pace! Do the math yourself:

Annual Demand for New Housing Units: approximately 1.7 million new units

Annual Supply of New Housing Units: less than one million

Bottom Line: Demand will become greater than the supply at some point in the near future, and house prices will go up.

Remember, there is no "national housing market" as all real estate markets are local. Therefore, a state like Michigan that is losing population may take longer to see house prices recover and go up; while a state that is gaining population, like Texas, may see house prices go up much sooner. In all cases, talk to your mortgage, financial, and real estate professionals for more details regarding your specific marketplace.