Economy, Housing and Real Estate May 23, 2013

Consumers’ pent-up demand promises economic boost

Economy, Housing and Real Estate

Paul Davidson, USA TODAY

American consumers have denied themselves so much for so long — putting off buying homes, cars and other purchases — that their pent-up demand is poised to kick-start a sluggish economy.

Four years into the recovery, stronger job growth, some loosening in bank lending and more stable household finances are finally paving the way for many Americans to move into their own homes, fill them with furniture and trade in creaky 10-year-old cars.

Last week, a measure of consumer sentiment showed buying attitudes toward appliances and other durable goods at the highest level since mid-2007. And the government reported that April retail sales solidly beat estimates despite huge federal spending cuts — a development that UBS economist Maury Harris partly attributed to an unleashing of pent-up demand.

Harris estimates that over the next five years, Americans' catch-up consumption will boost annual consumer spending growth by a percentage point and increase economic growth by half a point to more than 3% from about 2%.

"People have put things off," says IHS economist Chris Christopher. Now, he says, they're "feeling a little better."

After sharing a cramped one-bedroom Manhattan apartment the past five years, Justine and Matt Schwartz recently decided to move to a three-bedroom house in Greenwich, Conn. It will cost them hundreds of dollars a month in additional rent, as well as a new car lease and new furniture. Both Justine, a website editor, and Matt, a consultant, were promoted early this year.

After getting a raise, "I realized I don't have much to show" for it, Justine, 28, says. "We're feeling financially secure."

In the aftermath of the housing crash and recession, annual household formation was halved to 500,000 in 2008 and 2009 as Americans moved in with relatives and friends. Young adults aged 18 to 34 accounted for most of the drop, many of whom were unemployed, according to the Cleveland Federal Reserve Bank.

As a result, there were 2.3 million fewer households last year than there should have been based on population growth, Harris estimates. He expects those deferred households to sprout over the next five years — based on the recovery from the early 1980s recession — increasing household formation by 465,000 annually.

Housing starts, in turn, are expected to rise from 780,000 in 2012 to 990,000 this year and 1.2 million in 2014, Standard & Poor's predicts.

Other types of pent-up demand that should bust out:

Vehicle sales: The average age of cars and light trucks on the road is 11.2 years, up from 9.6 years in 2003, according to research firm Polk. Each new household leads to an average 1.3 new car purchases, UBS estimates. In the first quarter, 15.3 million new vehicles were sold at a seasonally adjusted annual rate, up from 9.4 million in early 2009.

Marriages: From 2005 to 2011, the marriage rate fell from 7.7 to 6.7 per 1,000 Americans, according to the Census Bureau. The rate should rise as young people move out on their own, juicing household spending, Harris says.

Births: Annual births fell by 7% to 4 million from 2007 to 2010. A family spends $226,920 on a child from birth through age 17, the Agriculture Department estimates.

Steve Hill and Sandra Brenner
Windermere Real Estate Seattle Northwest