Where is the housing demand?

According to some real estate analysts, the housing bubble has lost all of its air because we have worked off the excess housing stock built during the bubble, so builders will start building again to serve new demand.

However, three factors are reducing household formation, the primary driver of household demand:

1. Less immigration due to the post-2006 crackdown.

2. Less immigration due to the severe recession and high unemployment

3. 20-somethings who can’t get jobs are living with their parents.

Bottom line, household formation is about 1/3 of what it was forecast to be (0.3% growth instead of 1% growth). This is important because housing is a durable good with a very slow depreciation rate (about 1%/year). So replacement demand is only 1%, plus new household formation. If households are getting bigger, or immigration is slowing, or both, then demand drops precipitously, and prices fall.