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Bob, thanks for joining me.

Bob Johnson: Great to be here today.

Glaser: Let's talk about some of the bull case for demographics in housing. We have obviously had some shaky numbers recently. Maybe some of that's weather-related; maybe some of it's not. Could you walk us through, why you think housing might be a driver of the economy in the coming years?

Johnson: Sure. One of the key things I look at is that housing historically has averaged 4.5% to 5% of GDP, and that includes new homes, existing homes and remodeling. Right now that's running just around 3%. Like I said, it usually runs 5%. It's been as high as 7%. So we have got a lot of runway room in front of the economy that way, just in terms of percentages.

Then focusing a little bit more narrowly on the new-home market, housing starts are running about 900,000 in the latest report that we got today. And the long-term average there is more like 1.5 million starts, and again, it has been as high as 2.2 million home starts. We have a lot of room for improvement, and that's even given that the population has increased during that time over the years that those averages were formed. So that's some long-term good news for the housing market.

Glaser: How about household formation, though? Certainly it declined a lot as kids maybe stayed in their parents' basements for a little bit longer than they hoped. Are you seeing that to start to turn around?

Johnson: Well we are seeing the formations pick up a little bit. And again as you pointed out, it is the kids moving out into their first apartment from the parents' basements, and it's also some baby boomers retiring and moving back, as well. So, those are both trends that are changing the dynamics of the market a little bit.

Glaser: How about the divorce rate? Is that something you think impacts the housing market in a major way?

Johnson: Absolutely. I think because you couldn't sell your home before, people were divorcing in place so to speak: being divorced and living in the same household. Obviously that's a very uncomfortable situation. Now that home prices have come up and people have been able to sell their homes, again, that's something that pushes up the number of households, which means demand for housing. That's certainly a positive.

Glaser: You see this runway for growth and household formation is looking better. But we haven't seen the numbers, at least recently, look all that great for housing. What's holding it back in the short term?

Johnson: Yes. I think there are a number of issues and some of them may continue for some time. I think, the number one, is that credit remains incredibly tight. We saw some loosening in the middle of 2013, but not much. One of the ways I gauge that is looking by the average FICO score. It's a credit metric that indicates how good your credit has been, and it kind of ranges from up to 800 is the top of the scale and you work your way backwards from there.

Before the recession began, 710 was a typical score for an approved mortgage, and in 2009 it probably went up to something closer to 760, a pretty hefty increase. And frankly that number didn't budge into 2012 and now for 2013 it backed off ever so slightly, which actually helped the market a little bit in 2013. But until credit gets a lot easier, I think it's going to be hard for the housing market to fully get up ahead of steam.

Glaser: How about affordability? Housing prices have risen considerably off of their lows. Are houses just too expensive right now?

Johnson: I think, that's certainly one aspect that's holding the market back. Affordability ratios were substantially higher than they were six months ago, and there are two causes. One is the housing-price acceleration. We are now at 23% or 24% off of the bottom in terms of housing-price appreciation. And then on top of that, we've got higher interest rates. They have kind of moved up from the 3.5% range to the 4.5% range.

And there's less availability at the very low end of [housing prices], which was skewing some of the median numbers on what's actually out there available for sale.

You put those three things together and housing looks an awful lot less affordable than it did six to 12 months ago.

Glaser: If housing is being driven by maybe kids moving into their first apartment or boomers moving back into the city, how is this move to multifamily buildings different from say a recovery that's been driven by single-family homes?

Johnson: It's a huge difference. On the multifamily level, we are almost kind of back to where we were before the recession, something in the 500,000-600,000 range on the multifamily buildings. So that's certainly an interesting number to look at, and it has gone up for a considerable period of time. The single-family market is barely kind of off the bottom. Now we are kind of running maybe 600,000. It was as high as 1.7 million. And so we are still barely off of the bottom relative to the runway room in front of it.

What's happened is it's mainly these kids that are moving out of the basements and the baby boomers moving back to the city that are really driving this multifamily number. People who want single-family houses out in the suburbs is not yet a very good market.

Glaser: And why is that? Is that a function of the birth rate?

Johnson: Well I think there are certainly several factors involved there. Affordability, as you mentioned, is one of them. Apartments are a lot cheaper, and you don't need credit as much to move into an apartment. But certainly demographics aren't helping either. One of the primary reasons that people seek out a single-family home is when they have a child that needs to go to school.

And if you think about it those births that would've happened--kind of being the five-year-old range, that would have happened five years ago--at the depths of the recession when the birth rate wasn't terribly high. And so that move, that forced move out to the suburbs isn't happening this time around.

Glaser: Taking a look at all these demographic changes then, would you expect this to be a real permanent structural shift in the housing market, that we are going to see more multifamily homes and lower homeownership rates? Or is this just an echo of the Great Recession and you would expect it to reset?

Johnson: I think it's a cross between the two. I don't think we'll ever get back to the 2.2 million total starts that we had at one point in time. I think it's going to be a market that's going to have more and more multifamily homes, between higher gasoline prices, demographics, and so forth. I think that's going to push people a little bit more toward either renting an apartment or buying a condo.

And I think those things will hold back the conventional single-family market from what it once was. But on the other hand I don't think we are going to stay down here at 1 million starts or less for the next five years. I think we are going to see some slow and steady improvement in the years ahead.

Glaser: Bob, thanks for your thoughts on housing today.

Johnson: Great to be here today.

Glaser: For Morningstar, I'm Jeremy Glaser.