Wednesday, December 2, 2009

Are Home Builders Really Necessary?

I wish more real estate analysts could read Alvin Toffler, because the tone of the recent conversation about home building suggests that most people thinking about the subject can’t even imagine the possibility that a country’s need for indoor space could actually decline from one year to the next. They assume that more buildings will be needed every year, and it is just a question of how many more. Yet you don’t have to go far to see that this is not always true — that there are places where the construction of new buildings is not enough to keep up with the old buildings that are abandoned and demolished. To see what this looks like, you can go to a place like northern Pennsylvania. There, the population has remained relatively stable, and it is considered perfectly normal to live in a house originally built in the 1880s. There are new homes being built, for those families who insist on it, but the more common story is an old home being renovated.

The population of the United States is growing at about 2 percent a year, mostly from immigration. It is easy to look at the demographics and imagine that the country will need to build 2 percent more buildings every year. Yet that is not necessarily the case. People are also getting more efficient in their use of space. If space efficiency were to increase at the same rate as the population increase, there would be no net increase in the need for buildings.

Space efficiency is increasing because of technological improvements: flat-screen televisions that can hang on the wall, storage systems for closets, online magazines. It also increases because of social trends: people are giving away some of their excess possessions and are spending more time away from home. Current economic trends also encourage efficiency of space, notably the increasing cost of heating, cooling, and commuting. Looking at the next few years, it’s not hard to imagine people finding 2 percent improvement in space efficiency year after year.

As long as that’s the case, the need for new construction could be confined to high-growth areas. Observers waiting for a return to a 2 percent building rate in 2011 could be disappointed. Instead, building construction could decline from its current levels.

And a decline in construction would have implications beyond the building sector, in areas such as banking, lumber, and pickup trucks. General Motors pointed out recently that its sales of full-size pickup trucks, its strongest product category, are closely tied to new-home construction. If builders don’t have many new homes to build, they can keep driving the trucks they have.

Personally, I imagine another wave of building construction coming along in the 2020s. But I don’t know that, I’m just imagining it. No one really knows what the future holds that far in advance, because so many things will change between now and then.