The momentum is even more evident in California. According to data from the California Association of Realtors (CAR), the median price of existing detached homes increased more than 20 percent in September from year ago, and sales grew by 5.6 percent year-to-date, bringing down inventory. The unsold inventory index declined to 3.7 months, nearly half of the long-run average of 7. California's single family housing market now faces a supply shortage.
Likely to contribute to the positive momentum is the Golden State's demographic trend. Larger cohorts of the echo-boom generation aEUR" people born between early 1980s and mid-1990s -- along with immigration of relatively young people, are swelling household-formation age groups. Between 2010 and 2015, 20-39 year-olds will post a positive growth. This represents an addition of 592,000 young adults in their 20's and 30's. An increasing number of young people are getting ready to leave their parents' homes, to get married and have children, further supporting the addition of new households and creating increased housing demand. Household formation had been postponed due to economic weakness and uncertainty. CAR estimated that formations of up to 575,000 households have been delayed. If pent-up demands are realized as the economy picks up, housing demand will get lifted further.
Figure 1 Population growth by age group, California
*Based on projection from California Department of Finance. Sources: Census Bureau, California Department of Finance, Moody's Analytics, Milken Institute.
To be sure, it is not guaranteed that the growth of households and housing demand will be stronger than during the Great Recession; some unfavorable factors remain. Continuing uncertainty about the U.S. economy and budget policies may lead to a slowdown in immigration and put household formation under pressure. In addition, tight credit standards have been preventing potential home buyers from taking advantage of the record-low interest rates, forcing members of the echo-boom generation to delay home ownership.
According to a report by the Joint Center for Housing Studies at Harvard University, the size and age structure of the adult population is the primary driver of household formation in the longer term. Demographic trends imply a stronger demand for housing in California. Pent-up demands from the Great Recession and the entrance of the echo-boom generation into their prime household formation years, together with foreign immigration, allow for strong housing demand in California. How well the demand will materialize depends on the sustainability of job growth and availability of mortgage financing. Assuming that additions to housing stock are in fact cyclical and construction just bottomed out, price appreciation is expected as supply would need time to catch up.