The recent decline of mortgage interest rates has revived hopes for renewed recovery of residential building. If the decline is sustained, this is a realistic prognosis of considerable importance since increased housing market activity would contribute to continued expansion of the economy-at-large.
Some analysts add another element favoring rising demand for housing by asserting that the market is still buoyed by the echo effects of the post-war Baby Boom on household formation. This is a much more dubious point. The peak in the rising birth cycle after World War II was reached in 1961. Thereafter, the number of births was falling continuously to the late 1970s. We are in fact entering a period when the declining birth trend of the 1960s will reduce housing demand because the number of people reaching the typical age for setting up households of their own diminishes.
The average annual increase of households between early 1980 and early 1984, coming to nearly 1.2 million, was already considerably below the 1.6 million per year in the 1970s. The decrease can be partly attributed to poor economic conditions, including the recent major recession, which caused consumers to defer household formation. As people activate postponed plans in a more favorable economic climate and as lower mortgage interest rates make home purchases more affordable, housing-market activity is apt to expand temporarily. After this transitory effect wears off, however, the weakening of household growth is likely to put a damper on housing demand.