Summary: The refusal of housing construction to join the boom has baffled economists and investment experts. Demographic change explains much of this puzzle, and suggests that housing construction — a major driver of the post-WWII boom — will remain in the doldrums for several more decades.
Boom and bust of the housing market
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This graph shows the raw force shaping the US national housing market (regional trends differ). The key buyers are those in 25-45 year rows: buying their first home, then moving to larger homes. Their numbers boomed after 1970 and stabilized after ~2006. Those older than 60 are sellers: downsizing from single-family houses to retirement homes, then into nursing homes, then into their graves. The number of oldsters began to boom after 2005 (when the first Boomers turned 60), and will stabilize at higher levels from 2050-2100.
The cresting of the Age Wave explains the failure of the US housing market to recover after the crash — and suggests that more pressure on housing construction lies ahead. For the first time since the 1930s there is a wave of net sellers to meet buyers, ending the multi-century boom of easy real estate profits for developers (many of the Founders and early Americans were real estate developers). It’s the answer to a puzzle that’s baffled many investors…
Number of New homes sold per capita (civilian non-institutional population)
In the sixth year of the recovery the number of new home sales per capita has climbed up to the 1963-2007 lows — and stalled there. The previous lows were during the 1982-83 recession, with housing crushed by years of severe recession plus doubled-digit interest rates. Years of the Fed’s zero interest rate policy (and record low commercial rates) have produced a small bounce in new homes.
For several years after the bust we were told that the overbuilding in the bubble (net after homes torn down) would quickly be absorbed. But still housing remains stuck in low. This has baffled many economists and financial experts, whose models (based on history) tend to ignore or underestimate demographic effects. Alhambra Partners, says this shows we have a “Pseudo Recovery“. Lee Adler of Wall Street Examiner oddly says “The perverse incentives of ZIRP are why the housing industry languishes at depression levels.”
The “age wave” explains much of this mystery. The Boomers’ buying boosted housing demand in their youth and middle age, as only new construction could meet their demand (their generation being so much larger than their parents’). In their elder years the boomers’ downsizing provides homes for the next generation to buy — reducing the need for new construction. If marriage and fertility rates continue to decline, boomer selling might create a surplus supply.
Large scale demographic trends change almost everything, as Japan has learned since 1989. As we will learn in the coming years. It is not too early to prepare.
For More Information
Go to this website to see the population pyramid shown in more conventional terms — the age distribution by percent in each — for the US and other nations. Infoplease shows this for the US in tables by year.
- Must our population grow to ensure prosperity? — Spoiler: No!
- A rocky road lies ahead to a far smaller world population.
- The male pill is coming. It will change everything — About the next drop in population.
Also see my prescient and controversial posts about housing, written before the crash
- Diagnosing the Eagle: the housing bust, Dec 2007 — Bernanke disagreed. On 10 Jan 2008 he said “The Federal Reserve is not currently forecasting a recession.” He repeated that view on June 9.
- Knocking down houses in order to save the village, October 2008 — Correctly predicting the massive destruction of homes in overbuilt areas (e.g., Detroit, Fresno). Repeated in April 2009.
To learn more about the coming demographic changes, I recommend reading The Age of Aging: How Demographics are Changing the Global Economy and Our World by George Magnus.