'Simple arithmetic' shows how US home prices are headed for a drop

• The MBA thinks home prices could soon fall as population growth slows and boomers bring more inventory.
• The industry group pointed to lower household formation in the US, with supply expected to rise.
• Baby Boomers, meanwhile, are expected to add 250,000 homes to the market each year through 2035.

The housing supply shortage that's kept the market stuck in low gear might be on the edge of a reversal, bringing relief to buyers struggling against historically low affordability.

The Mortgage Bankers Association says it sees the potential for home prices to fall in the medium term due to shifts in demographic trends that should add to the US's housing supply. Meanwhile, slowing population growth and lower housing demand will even out the demand side of the equation, the association wrote in a white paper on Monday.

"We argue that the post-financial crisis narrative of a persistent housing shortage may no longer accurately describe market conditions over the decade ahead," a team led by Michael Fratantoni, the MBA's chief economist, wrote. "If construction remains elevated, supply growth could outpace demand growth, pushing home prices lower."

The association said it expects home prices to tick up a relatively muted 1% this year and be about flat over the next two years, suggesting that lower home prices could soon follow.

Fratantoni's team highlighted several ongoing demographic trends they believe are "weakening the foundations of housing demand." Here were the factors they said could slow household formation through the next decade:

• The fertility rate has been declining. The fertility rate is expected to fall to 1.56 births per woman over the next decade, according to projections from the Congressional Budget Office, down from 1.6 births per woman last year. Deaths are also now expected to surpass the number of births each year by 2030, earlier than the CBO originally anticipated, the association said.

• The population is aging. Gen Zers are nearing the age at which most people become first-time homebuyers, but the generation is smaller than the millennial and baby boomer cohorts, according to the MBA.

  Younger Americans have also generally leaned away from homeownership in recent years due to affordability constraints.

• Immigration has been falling, which has also reduced household formation in the US. Net international migration dropped to 1.3 million as of July last year, down from a peak of 2.7 million the prior year, according to the Census Bureau.

• Boomers are expected to slowly give up their homes. The association pointed to one report that estimated the US would see an additional 250,000 housing units a year in the decade following 2025 due to baby boomers aging.
  
  "Boomers will likely be adding to the housing supply as they age further, but we do not expect a 'silver tsunami' that would flood the market," the MBA said, referring to more dire predictions that boomers will unleash a wave of fresh housing supply as they grow older.

In sum, the MBA said it expects the supply of homes to grow between 10.6 million and 14.6 million units through 2035.

Demand for homes, meanwhile, is expected to clock in at 1.13 million units per year from 2025 to 2035, before falling to 802,000 units per year.

"That simple arithmetic has profound implications for how we think about housing supply adequacy," the MBA said, speculating there could be knock-on effects across the mortgage industry as Americans take out fewer loans to finance a new home.

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