Sunday, January 27, 2008

Generational Housing Bubble?

I have commented before that there is good evidence to lead me to believe that the current run up in housing is not just a cyclical real estate price pattern but also a generational pattern that perhaps began in the mid-70s or 80s.

Here is a really interesting paper discussing this possibility.

Some highlights:

The giant baby boom generation born between 1946 and 1964 has been a dominant force in the housing market for decades. This group has always provided the largest age cohorts, and has created a surge in demand as it passed through each stage of the life cycle. As its members entered into home buying in the 1970s, gentrification in cities and construction of starter homes in suburbs increased. Their subsequent march into middle age was accompanied by rising earnings and larger expenditures for move-up housing. Looking ahead to the coming decade, the boomers will retire, relocate, and eventually withdraw from the housing market.

Given the potential effects of so many of these changes happening in a limited period of time, communities should consider how best to plan this transition. Communities in the United States face an historic tipping point. After decades of stability, we expect the ratio of seniors to working-age residents to grow abruptly, increasing by roughly 30% in each of the next two decades.

We also expect that this change will make many more homes available for sale than there are buyers for them. The exit of the baby boomers from homeownership could have effects as significant as their entry, though with different consequences.

Sellers of existing homes provide 85% of the annual supply of homes sold, and home sales are
driven by the aging of the population since seniors are net home sellers. The ratio of seniors to working-age residents will increase by 67% over the next two decades; thus we anticipate the end of a generational housing bubble. We also find that younger generations face an affordability barrier created by the recent housing price boom. With proper foresight, planners could mitigate what otherwise could be significant consequences of these projections.


We argue that the United States is currently experiencing a short-term housing market bubble that is nested within a longer-term, generational housing bubble of greater magnitude. The recent housing price boom has been remarkably strong. From 2000 to 2005, the median sales price reported by the National Association of Realtors rose 48.6% nationwide, and in some areas, such as California, the median sales price rose 117.1%. Only in 2007 did prices begin to slip in particular metropolitan areas and nationwide. This price run-up had a two-edged effect that substantially increased the home equity of existing homeowners while at the same time making housing less affordable for would-be home buyers. The result is a sharply increased generation gap, with the baby boomers largely gaining, while members of younger generations face higher affordability hurdles.

14 comments:

jesse said...

"Looking ahead to the coming decade, the boomers will retire, relocate, and eventually withdraw from the housing market."

We are already seeing the effects to some degree: underutilised housing. My grandparents lived alone in their 4 bedroom house until well into their 70s. They eventually moved into a (large) condo. I am expecting the exodus of retirees from SFH to be delayed longer than people (and the retirees) think.

jay said...

This is a subject which I have been interested in for a long time. The boomers insistence that real estate is always a winner could be based in this trend. Thanks for bringing it up and keep and eye on it please.

M- said...

Some other generational-effect links:

From the US Federal Reserve:
http://tinyurl.com/nxxwk
(it's long and complex, but very interesting, worth a careful read!)

and Generational Dynamics:
http://www.generationaldynamics.com

Strataman said...

Really great you brought this up mohican. I've thought for quite some time thru booms and busts that in fact those were just rises and dips in an othewise multi generation bull market. In another words there is a bigger bubble then the one we are all pre-occupied with. Scary thought is we could be reaching the top in that bubble and have a multi-generational bear market, which of course will also have it's up years. Possibly though we may have reached a point where deteriorating infrastructure, (example:airports that can't handle traffic) and environmental concerns(where can everyone put their garbage?) that we are reaching a peak in many things. Not a good time to be born I think! :-)

patriotz said...

Underutilized housing represents pent-up supply. The owners may be living in the houses for longer than we think, but they will leave, one way or another, and the number of occupants will increase when the property changes hands.

Nightmare scenario: a whole cohort of buyers locked into condos with 40 year mortgages and no equity, while this pent-up supply is being released. Where will the move-up buyers come from?

Grover Borequist said...

A quote from the paper which I hope will resonate with anyone thinking about buying now or in future:

"When market fundamentals drive housing prices up, word
of mouth and the fear that rising prices will make future
purchases unaffordable amplify the trend. As a result, the
number of buyers in the market increases to include both
speculators5 and young adults accelerating their entry into
homeownership. Thus, paradoxically, because of the
investment incentive, homeownership generally rises when
housing prices are rising rather than when housing is
becoming more affordable."

patriotz said...

Thus, paradoxically, because of the investment incentive

Er, I would say speculatory incentive.

Yield is the incentive for a real investor. Buy low, sell high.

freako said...

My grandparents lived alone in their 4 bedroom house until well into their 70s.

And I have no doubt that the incentive to move out has been reduced by rising prices. SFH living grandparents everywhere have seen annual gains of $50K to $100K for the past few years. Pent up supply.

Underutilized housing represents pent-up supply.

Yes, that is the peculiarity of forward looking "products". If prices get out of line, you'd expect INCREASES in supply, not reductions. Lot's of pent up supply will be unloaded once the market reverses.

A quote from the paper which I hope will resonate with anyone thinking about buying now or in future:

Yep, we have been arguing that line for years. Buyers are extrapolators. In any consumer product, buyers would either buy less or use a substitute product if prices rise. But due to price extrapolation, rising prices increase ownership demand.

Those on the renting side of the ownership calculation come from two groups:

1. Life long renters.
2. Young people who intend to buy when in position to do so.

I don't think the increase in ownership comes from a decrease in lifelong renters. Rather I think it is the latter. Young people "bum rushed" the market trying to get in, which of course set off a run away demand train. The implication: we have borrowed from the future. There will be a dearth of potential buyers going forward.

The U.S. ownership rate has already peaked and is going back down.

The supply runs the risk of getting hit by a perfect storm.

1. Pent up supply from those holding off selling because of rising prices.

2. New construction completing.

3. Foreclosures.

4. As strataman suggests, this could be supplemented by an independent factor, aging boomers leaving their SFH's.

Gabriel said...

While I don't disagree with the cyclical side of things, I'm curious if this generational housing bubble or secular bear trend would be offset by immigration.

As long as we see over-all population growth wouldn't it mean that the supply of people would negate the generational housing bubble?

Thou, I think market trends in the end have more to do with credit than the aging population.

http://www.zealllc.com/2008/spxbears.htm

Interesting read if you want to take a look at it.

patriotz said...

I'm curious if this generational housing bubble or secular bear trend would be offset by immigration.

No, because we've always had substantial immigration since WWII. IOW it's been a given through up and down cycles, and to counteract the generational bear trend there would have to be a big increase in immigration above that. But immigration today is actually lower than it was in the 80's and 90's.

jesse said...

"As long as we see over-all population growth wouldn't it mean that the supply of people would negate the generational housing bubble?"

Unless immigration quotas are upped (which is possible) a constant rate of immigration cannot compensate for a variable supply. Also the immigrants coming to Canada must be able to afford the house prices, either from savings from their homelands or from the jobs they take/create in Canada.

Newcomer said...

"While I don't disagree with the cyclical side of things, I'm curious if this generational housing bubble or secular bear trend would be offset by immigration."

If you look at the Case-Schiller graph for the States, immigration did not change the fact that adjusted prices were flat.

Drachen said...

Immigrants are, for the most part, poor. They rent.

Not a factor.

patriotz said...

If you look at the Case-Schiller graph for the States, immigration did not change the fact that adjusted prices were flat.

In fact real prices actually fell during the early 20th century, the greatest period of urban immigration that the US has ever seen.

This was due to improved transportation greatly increasing the supply of land and improved technology reducing building costs.

Immigration per se does not change market fundamentals.

Immigrants are, for the most part, poor. They rent.

Whether people rent or buy is immaterial to fundamentals. What matters is income, which drives rents and prices.

If immigrants had higher incomes than locals (which they don't) they would drive up prices even if they all rented.