Demand Seen as Balancing Strong Home Building Pace

Amid fresh evidence of robust home building, experts marvel that builders haven't yet stumbled over a housing glut.

The Commerce Department reported this week that November housing starts were 0.8% higher than a month ago and reached a seasonally adjusted annual pace of 1.53 million units.

At the same time, a new study by Regional Financial Associates found that the nation's long-term supply of homes equaled 1.77 million units in the third quarter, while demand equaled 1.98 million units. The slight shortfall is just over a month's demand for homes.

"Given the strong level of new home building and the number of mobile homes shipped, it's a testimonial to how strong the economy is" that supply and demand are so finely balanced, said Mark Zandi, chief economist at the West Chester, Pa., consulting firm.

Mr. Zandi attributed the healthy demand to two important factors-strong household formation among the "baby-bust" set, and the long-overdue recovery of California's housing market.

A strong job market and rising average wages have enabled many people in their 20s and 30s to leave their parents' homes and set up their own households, Mr. Zandi said. Over the last three years, an average of 1.3 million new households were formed annually.

California and the Northeast, which were hardest hit by recessions this decade, are finally recovering and will "continue to drive the market in 1998," he said.

Indeed, those two regions continue to be somewhat underbuilt. In the third quarter, each had a shortfall of homes equal to 2.8 months of demand.

By contrast, the South and Midwest are somewhat overbuilt. Mr. Zandi predicts that home prices will grow only sluggishly in southern cities such as Raleigh and Charlotte, N.C.; Birmingham, Ala.; and Fort Myers, Fla. Slow growth is also expected in midwestern cities such as Indianapolis, St. Louis, and Cincinnati, as well as Columbus and Dayton, Ohio.

And as for the nation as a whole, "home building can't continue at this pace through the decade," Mr. Zandi warned.

By decade's end, Mr. Zandi predicts, household formation will slow to 1.1 million per year.

"Ultimately the demographics are going to win. They always do," he said.

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