Demographics on why housing will drop for 10 years!


By EconPete   Follow   Sat, 10 Mar 2012, 4:47am   5,775 views   30 comments
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Naturally when looking at the future value of the current stock of housing, population growth is a major variable in determining its worth. Another important factor is the median wage of all potential buyers. If the population is growing, then it makes sense that there is a shortage of homes and prices would have a tendency to rise until the stock of homes is able to accommodate the growing demand. Then, the opposite must be relatively true for a shrinking population. An excessive supply of homes, due to a larger cohort of buyers preceding a smaller cohort, will have a tendency to produce falling asset prices.

The median age for a first time home purchase is about 30, and the median age for a second home purchase is about 41 (although both are slowly rising due to increased schooling debt and other unfavorable economic factors on the younger generations). Now since the Baby Boomers, with a population of about 80 million, were born between 1945 and 1964, this would mean that the last of the surge in population has just finished buying their final and largest upgrade in housing. Add 41 years to 1964 and you get 2005. This date must seem fairly close to the start of the decline in housing.

Well, who followed the Baby Boomers to keep up with this ever increasing demand? Generation X are people born between 1965 and about 1982. The problem here is that the entire population only consists of approximately 46 million individuals! One could see how such fewer potential buyers would have devastating effects on the value of homes. When you add 41 years to 1982, you get 2023. This means that Generation X will dominate the home buying process for about the next 12 years. What is even worse is that this cohort didn't have as high of wages and the same opportunities as the Boomer Generation because they didn't get the benefit of being employed during a high rate of population growth. In fact the opposite was true.

Now there is hope, Generation Y enters their peak home buying years pretty soon. This cohort is similar to the Boomers in magnitude, about 78 million. This may sound as a relief especially when you add 30 years to 1983 and get 2013. Well, this generation is not quite as excited about buying homes as their preceding cohorts. With the boomers leaving their peak earning years and stuck with underwater mortgages and extremely high healthcare costs, they are refusing to give up their good jobs, but rightfully so. The young today are suffering from a lack of sufficient jobs and a huge burden of student debt. The tendency for either skilled or unskilled labor to work in one company for 30 or 40 years, which was the norm in the past, is long gone! No longer will 30 year mortgages be justifiable. No longer will people want to be tied down to a particular city or state. This generation is the age of fast technology and increasing mobility, and a home is the negation of that.

I do think the future of housing rests on the interest of Generation Y. It may pay to start looking at Generation Y's circumstances and interests when trying to predict if housing is a good investment!

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  1. toothfairy


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    1   8:14am Sat 10 Mar 2012   Share   Quote   Permalink   Like   Dislike  

    Does generation Y include immigrants?

  2. EastCoastBubbleBoy


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    2   7:41pm Sat 10 Mar 2012   Share   Quote   Permalink   Like   Dislike  

    How is Gen X only 48 million people if Gen Y is 78 million?
    Also when exactly does one reach thier peak earning capability, and how does that impact your projections.

  3. EconPete


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    3   7:34am Thu 15 Mar 2012   Share   Quote   Permalink   Like   Dislike  

    It is simple; less people were born between about that 20 year window than the previous one. I think it has to do with the fewer births during the great depression because of poor economic conditions. This would have reduced the number of potential parents between 1965 and 1982. 1934 plus 30 years (which is an average age for child bearing) and you get 1964, which is the end of the baby boom generation. Also, 1942 plus 40 years (which is basically when people stopped having kids) and you get 1982, the end of Generation X. Individual's peak earning years are between 40-55 years of age which is why they are upgrading to their second, usually larger, home. After the purchase is made, with debt of lets say $300,000, people have to pay their current income to the previous quick, short-term stimulus for the next 15-30 years. This is a drag on future years economic output because that money was already viewed as income to someone else. This $300,000 was created out of thin air by the banks through fractional reserve banking based solely on the belief that it will be paid back. These future dollars are all not going to the future economy, they are going to pay down the freshly created increase in the monetary supply. Hopefully their will be a large enough population to subsequently go massively into debt to make enough output, which is equal to income, for them to pay down their debt. Well, if there is not, the government can always take out trillions of dollars worth of debt annually…. which is exactly what they are doing.

  4. EconPete


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    4   3:03am Fri 16 Mar 2012   Share   Quote   Permalink   Like   Dislike  

    At least we are not in the same position as Europe! By 2050 the US population will still grow by about 80 or 90 million. In Europe, demographers are expecting a decline in population of about 100 million!
    Quote from the book "Fewer" written by Ben J. Wattenberg:

    "In the year 2000 the population of all of Europe, stretching from Ireland to Siberia, including 47 nations, was 728 million people. By 2050, according to the UN Medium Variant projection, European population is estimated to be 632 million, a drop of 96 million people, and falling rapidly. In short, Europe down 100 million, America up 100 million."

    I wonder what this will do to real estate prices in Europe!

  5. mdovell


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    5   5:49am Fri 16 Mar 2012   Share   Quote   Permalink   Like   Dislike  

    There's actually an article that talks about this very subject.
    www.scag.ca.gov/Housing/pdfs/trends/AgingBabyBoomers_GHB.pdf

    Basically there is a curve that shows when people are more likely to move. As states have baby boomers that reach that peak it will slow further.

    It isn't so much that people will automatically move to warmer climates but more like after a given time it will slow. How many 70-80 year olds move vs 50s and 60's?

    If anything is considered an investment the planning is important. Housing isn't nearly as liquid as stocks but if there is a gradual move out some might get stuck. Even if a stock goes down to $5 you can still sell it. With a house it isn't nearly as easy.

  6. thunderlips11


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    6   8:03am Fri 16 Mar 2012   Share   Quote   Permalink   Like   Dislike  

    It's all about Demographics. Thanks mdovell for the link, interesting read.

  7. beentheredonethat


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    7   8:08am Fri 16 Mar 2012   Share   Quote   Permalink   Like   Dislike  

    Bap33 says

    does immigrants include invaders here illegally and their spawn dropped while invading?

    Yes. But so what?

  8. freak80


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    8   8:23am Fri 16 Mar 2012   Share   Quote   Permalink   Like (2)   Dislike  

    Bap33 says

    does immigrants include invaders here illegally and their spawn dropped while invading?

    You can thank the Catholic Church's position on birth control for that.

    That's what I don't get about the "Pat Buchannan Conservatives." They don't like birth control and abortion, but they don't like the natural results of those policies either: hoards of poor, uneducated people being born into third-world cesspools like Mexico and then desperatley trying to escape.

    "We'll defend you in the womb, but shoot you at the border."

  9. clambo


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    9   8:54am Fri 16 Mar 2012   Share   Quote   Permalink   Like (2)   Dislike  

    The demographics for houses is bad in several places, and won't improve for social reasons.
    Think why the demographics were previously GOOD for houses: a growing US economy, a growing US population, rising education levels,and rising median wages. These created a rising house median price, but it rose really with wage inflation.
    NOW, the US economy is growing very slowly (1.7% 2011) the population is growing but with anchor babies of illegal aliens who do not achieve high education, and median wages are not rising, but falling.
    Many of generation Y, like my friend's two kids, are marginally productive semi-slackers who won't save up the down payment for a house here in their adult lives.
    Also, the anchor babies are not going to save up the down payment for a house either, they're not even going to achieve 4 year college degrees.
    House prices are going down, it's like gravity. Gravity sucks, but it's the law.

  10. freak80


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    10   9:35am Fri 16 Mar 2012   Share   Quote   Permalink   Like   Dislike  

    clambo says

    NOW, the US economy is growing very slowly (1.7% 2011) the population is growing but with anchor babies of illegal aliens who do not achieve high education, and median wages are not rising, but falling.

    True. Our population is only growing due to immigration, and most of those immigrants are dirt poor. And the middle class is dissapearing. Fast. We're becoming a nation with "haves" and "have nots." Like we were 100 years ago.

    Still, RE prices in the Bay Area could stay high if all of the "haves" want to live there. And I think there's evidence for that assertion. And if you're not one of the "haves", there's no reason to try and live there. You'll spend your whole life as a wage-slave to either Your Landlord or Your Bank.

  11. Robber Baron Elite Scum


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    11   2:40pm Fri 16 Mar 2012   Share   Quote   Permalink   Like (2)   Dislike  

  12. Robber Baron Elite Scum


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    12   2:41pm Fri 16 Mar 2012   Share   Quote   Permalink   Like (1)   Dislike  

  13. thomas.wong1986


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    13   6:01pm Fri 16 Mar 2012   Share   Quote   Permalink   Like   Dislike  

    wthrfrk80 says

    You can thank the Catholic Church's position on birth control for that.
    That's what I don't get about the "Pat Buchannan Conservatives." They don't like birth control and abortion, but they don't like the natural results of those policies either: hoards of poor, uneducated people being born into third-world cesspools like Mexico and then desperatley trying to escape.
    "We'll defend you in the womb, but shoot you at the border."

    Tell that to the Chinese (1.3Billion) and the Indians (1.1Biilion) and the other non-christan eastern nations who have a larger population vs Western nations.. Perhaps if the were Christian, they too would have had a lower population.

    http://en.wikipedia.org/wiki/World_population

    Mexico isnt that bad compared to Indo-China population.
    Take a trip to India to see a real cesspools.

  14. ThreeBays


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    14   8:31pm Fri 16 Mar 2012   Share   Quote   Permalink   Like   Dislike  

    Hmm, I don't know. If this is correct then right around now the largest generation is settled in a home. They are going to be settled in there until they need to downsize, and are especially not going to want to sell while prices are low unless they have no choice.

    So... you would expect fewer homes on the market, and right now that is what we see.

    But due to the retiring generation X, which should be over the next 20 years or so, and if it's true what they say that on average they have no savings other than their home, imagine what that will do.

  15. ThreeBays


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    15   8:38pm Fri 16 Mar 2012   Share   Quote   Permalink   Like (1)   Dislike  

    Check the 2nd slide here http://www.census.gov/hhes/www/laborfor/Working-Beyond-Retirement-Age.pdf

    Between 2010 to 2030 the retirement age population will roughly double.

  16. bob2356


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    16   8:22am Sat 17 Mar 2012   Share   Quote   Permalink   Like   Dislike  

    thomas.wong1986 says

    Tell that to the Chinese (1.3Billion) and the Indians (1.1Biilion) and the other non-christan eastern nations who have a larger population vs Western nations.. Perhaps if the were Christian, they too would have had a lower population.

    Something like 200 million of people were living in China and probably just as many in india when the pilgrams landed at plymouth rock. I think they had a little head start on populating their countries.

  17. TMAC54


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    17   10:11am Sat 17 Mar 2012   Share   Quote   Permalink   Like   Dislike  

    EconPete says

    Demographics on why housing will drop for 10 years!

    The declining Marriage rate should also be considered a demographic concerning real property pricing.
    Era 2030 will see the last marriage in America, that's if the present rate of decline continues.

    Single individuals are NOT the target audience for purchases of our traditional 3 bed 2 bath lawn mowers or rambling ranch style homesteads.
    The Bay area has (in the last twenty years) realized a significant increase in construction catering to that single lifestyle. Japan & China's marriage rates are also on the decline.
    Does this mean demand in Condo's will increase ?

  18. tdeloco


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    18   12:47pm Sat 17 Mar 2012   Share   Quote   Permalink   Like   Dislike  

    EconPete says

    Generation X are people born between 1965 and about 1982.

    In addition, the birth control pill came out in early 1960's. How about Roe v Wade in 1973. Did that make a difference?

  19. ThreeBays


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    19   10:20pm Sun 18 Mar 2012   Share   Quote   Permalink   Like   Dislike  

    Toossi, M. (2012). Labor force projections to 2020: A more slowly growing workforce.

    http://www.bls.gov/opub/mlr/2012/01/art3full.pdf

    Take a look at the table on page 44

    The thing I noted is that between 2010 and 2020 there is still an increase in the projected labor force aged 25 to 54, of about 2 Million. That to me seems like the "house buying" group, so demand will be there.

  20. tdeloco


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    20   10:39pm Sun 18 Mar 2012   Share   Quote   Permalink   Like   Dislike  

    ThreeBays says

    The thing I noted is that between 2010 and 2020 there is still an increase in the projected labor force aged 25 to 54, of about 2 Million. That to me seems like the "house buying" group, so demand will be there.

    Thanks for the link. I see the 200,000 annual increase for 10 years, but you need to multiply that by the labor force participation rate. So approx 1.3 Million working people.

  21. spicer77


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    21   3:16pm Mon 19 Mar 2012   Share   Quote   Permalink   Like   Dislike  

    Great link. Who knows how reliable the conclusions, which is all i care about. I am on the edge of gen X (1964).
    What a freakin mess!!!!

  22. BoomAndBustCycle


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    22   3:45pm Mon 19 Mar 2012   Share   Quote   Permalink   Like   Dislike  

    ThreeBays says

    Between 2010 to 2030 the retirement age population will roughly double.

    And jobs to care for the elderly will roughly double.. and the positions that once were held by all these retirees will become available to the next generation.

    We might have a shortage of skilled people and huge wage increase soon.

  23. bubblesitter


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    23   4:00pm Mon 19 Mar 2012   Share   Quote   Permalink   Like (1)   Dislike  

    BoomAndBustCycle says

    We might have a shortage of skilled people and huge wage increase soon.

    Except that those jobs will be overseas. LOL.

  24. Ian Ollmann


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    24   11:42pm Mon 19 Mar 2012   Share   Quote   Permalink   Like   Dislike  

    BoomAndBustCycle says

    ThreeBays says

    Between 2010 to 2030 the retirement age population will roughly double.

    And jobs to care for the elderly will roughly double.. and the positions that once were held by all these retirees will become available to the next generation.

    We might have a shortage of skilled people and huge wage increase soon.

    That would assume the retirees have any money. They might for a little while. Another conclusion one might make is that the worker productivity in the elder care industry would have to double. We can't actually afford to pay for the retirement of all those people at traditional rates.

  25. ThreeBays


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    25   12:16am Tue 20 Mar 2012   Share   Quote   Permalink   Like (1)   Dislike  

    BoomAndBustCycle says

    ThreeBays says

    Between 2010 to 2030 the retirement age population will roughly double.

    And jobs to care for the elderly will roughly double.. and the positions that once were held by all these retirees will become available to the next generation.

    We might have a shortage of skilled people and huge wage increase soon.

    That's great because every 2 people will be paying the welfare of 1 retiree, so all those wages will come in handy to pay a ton more tax.

    But wait, where will the economy get all that money for those huge wage increases? Are the extra retirees going to hugely increase our GDP? Will the extra care service jobs hugely increase real productivity?

    Doubt it. What we will have is a shrinkage of the pie (in real prices), with inflation galore to prop up nominal prices.

  26. TyDoe


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    26   8:41pm Sun 6 May 2012   Share   Quote   Permalink   Like   Dislike  

    As far as the housing crisis that were in cause by many factors such as loan and credit balances, the uptick in inflation for counstruction materials, the subprime mortgage bulge....all that is another story.But when considering that different generational cohorts will pull us out of this mess is absurd.True once numbers our on file they stick, but just based on numbers as each cohort, like Gen X, moved through different life stages,you cant base it on just that...and from the looks of it...the Gen X workforce may be just the ones to boomerang the economy back to us.My parents were born during the Gen X bunch and are two hard working individuals who refuse this economy and housing crisis get to them.And my Generation Y doesnt even know what hit us let alone care about it.But hopes for a greener pastures are ahead just as my generation hits the workforce in a slower pace then in the early to mid 2000s.Gen Z is not far behind.....lol can we say echo?????

  27. hanera


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    27   5:49am Sun 13 May 2012   Share   Quote   Permalink   Like   Dislike  

    Life expectancy. Longer life expectancy means need the house longer and need to work longer.

  28. Michinaga


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    28   6:40am Sun 13 May 2012   Share   Quote   Permalink   Like   Dislike  

    It bothers me a bit to see the increasing usage of "Generation Y" as a synonym for the Millennial generation, born from 1982 to the mid 2000s. I remember first seeing this word used for the generation of people who bridged Gen X and the Millennials, born between the mid-1970s and late 1980s (basically the Ford, Carter, and Reagan administrations).

    I think societal change now moves too fast for 20+ years to define cohorts of people. Someone born in 1964 had an upbringing and early adulthood that was wildly different from what someone born in the late '70s or early '80s experienced. There really should be a dividing line around 1973, the year of the Roe v. Wade decision -- the number of babies born dropped significantly at this time.

  29. REpro


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    29   10:00pm Sun 13 May 2012   Share   Quote   Permalink   Like   Dislike  

    TMAC54 says

    Does this mean demand in Condo's will increase ?

    Absolutely. Also expect higher number of single moms taking care of 1+ children living in units supported by Section 8.

    ThreeBays says

    Hmm, I don't know. If this is correct then right around now the largest generation is settled in a home. They are going to be settled in there until they need to downsize, and are especially not going to want to sell while prices are low unless they have no choice.
    So... you would expect fewer homes on the market, and right now that is what we see.

    They don’t have a choice. California is not a destination for retired people. It happens now, retires are selling they houses for whatever can get and move to FL, CO, OR or AZ were houses are still comparably cheap.

  30. FortWayne


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    30   7:46am Mon 14 May 2012   Share   Quote   Permalink   Like   Dislike  

    We were in Central California for the weekend. I have to tell you, still very many people there talk about how much money they've made or will make from selling/buying their houses.

    The attitude of "I bought a house and therefore I'm a winner" is still very prevalent in many places. Don't think this bubble will be over soon.

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