Projected Slowdown in Labor Force Growth Suggests Weaker Future Housing Activity

Fannie Mae's Economic and Strategic Research group forecasts a healthy rebound in new housing production later this decade as housing markets return to normal (see Brian Hughes-Cromwick's recent FM Commentary). However, beyond that, an anticipated slowdown in workforce expansion suggests more modest prospects for new housing demand and construction than witnessed historically.

In the latest edition of Housing Insights, we project that labor force growth will slow substantially in coming years. Even using optimistic assumptions about future labor force participation rates (the proportion of the population in a given age and sex group that is either employed or actively looking for work), we expect that workforce growth between 2012 and 2025 will be well below the historical average.

The implications for housing are substantial. Reviewing five decades of historical data, we find that the number of new housing units produced is positively and strongly correlated with labor force growth. The association between housing production and labor force growth is at least as strong as the correlation between housing production and growth in households, payroll employment, or population. Given the positive correlation between housing production and labor force growth, the anticipated marked slowdown in workforce expansion implies weaker housing demand and homebuilding activity than observed in the past.

Patrick Simmons
Director, Strategic Planning
Economic and Strategic Research Group

August 15, 2013

The author thanks Orawin Velz, Xiaolin Xing, and Meiyi Shi for valuable comments in the creation of this commentary. Of course, all errors and omissions remain the responsibility of the author.

Opinions, analyses, estimates, forecasts and other views of Fannie Mae's Economic and Strategic Research (ESR) group included in this commentary should not be construed as indicating Fannie Mae's business prospects or expected results, are based on a number of assumptions, and are subject to change without notice. How this information affects Fannie Mae will depend on many factors. Although the ESR group bases its opinions, analyses, estimates, forecasts and other views on information it considers reliable, it does not guarantee that the information provided in these materials is accurate, current or suitable for any particular purpose. Changes in the assumptions or the information underlying these views could produce materially different results. The analyses, opinions, estimates, forecasts and other views published by the ESR group represent the views of that group as of the date indicated and do not necessarily represent the views of Fannie Mae or its management.

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