Tuesday, December 30, 2014

The Bursting of the Generational Housing Market Bubble

A paper by Dowell Myers and SungHo Ryu at the University of Southern California looks at what could be the ultimate bursting of the housing bubble in the Unted States.   While everyone from government to the nation's central bankers is quite pleased with themselves when it comes to the resurgence of the housing market since the depths of the Great Recession, this analysis suggests that the improvement may be temporary, thanks in large part to the nation's demography.

Let's open with a look at the composition of the population of the United States by age using a population pyramid:

Normally, the population of both men and women decreases relatively smoothly as age increases.  As you can see on the pyramid above, population does not decrease with smoothly with age, in fact, the number of people in each age bracket generally increases or remains constant between the ages of zero and 60 and slowly declines thereafter.  The shape of the U.S. population pyramid is largely due to the impact of the baby boom.

Now, let's switch gears and look at both historical and projected population growth.  Here is a bar graph showing growth in the U.S. population age 25 and over for each decade from 1960 to 2030 showing the difference in the population growth rates for those aged 25 to 64 (in dark grey) and those aged 65 and older (in light grey) along with the age group that accounts for the largest amount of growth over that decade:

This gives us a bit of a sense about how the changes in the growth rate of older Americans could have an impact on many social and economic issues, particularly the housing market.

Baby boomers were born between 1946 and 1964 and have been a significant force in the United States and world economies ever since.  As the oldest of the baby boomers married and had children in the early 1970s, they purchased increasing numbers of homes, particularly in suburban neighbourhoods throughout America.  This had a market impact on the number of new homes built and sold as shown here (excluding the mid-1970s recession) when compared to the purchase levels of the 1960s:

This rather sharp increase in the growth rate of the housing market appears to be part of a generational housing bubble, created largely because of the rapid growth in the number of baby boomer housing consumers.

Of course, this is going to change with time.  The first of the baby boomers reached age 65 in 2011 and the last will cross the 65 year threshold in 2029.  As we can see on the population pyramid, there are fewer younger people to follow, meaning that the ratio of senior citizens to working-age, younger adults will rise.   History shows that as people, including baby boomers, age and retire, they will change their housing consumption by:

1.) Moving to smaller homes since there are no longer children resident in the family home.

2.) Relocating to regions of the nation that they find more appealing.

3.) Withdrawing from the housing market as they move into long-term care.

Here is a graph showing the buy and sell rates for each age group showing the relationship between age and house buying and selling behaviours:

Interestingly, in all but three states, after the age of 70, most people are net sellers of homes.  

Obviously, the exit of baby boomers from home-ownership will have a significant impact on the housing market since more homes will be for sale and there will be far smaller growth in the number of people between the ages of 25 and 64 who want to purchase a home.  What this means is that there will be far more house sellers than there are house buyers, a situation that will likely lead to the bursting of the generational housing bubble.  The point where the number of buyers equals the number of sellers is referred to as the cross-over point, a point in time which varies by state as shown on this table: 

The first of the states have likely already crossed the point where the number of buyers equals the number of sellers.  

The biggest losers in this scenario will be the baby boomers that are relying on the value of their homes to fund their retirements, particularly the youngest among the baby boomers who will be at the tail end of the bursting of the generational housing market bubble.  Since home equity makes up the largest portion of net wealth for most households (i.e. other than the wealthiest households), the soon-to-be elderly in many states will find themselves facing falling housing prices and declining net worth.  

From this analysis, we can see that the housing boom of the mid-2000s was just part of a long-term generational housing bubble, created largely by the boom in births following the Second World War, an event that has happened only once in modern history.  Once baby boomers begin to sell their homes en masse, their actions could have a negative impact on America's housing market for up to two decades, putting a final, painful end to the generational housing bubble.


  1. The last chart shows that NY, HI, CT crossed over to more sellers than buyers 4 years ago. Shouldn't house prices have already started to decline in these states, according to your analysis?

    1. I suspect that there will be a lag between the cross-over point and dropping prices. Here's one example: if you go to FRED and look at the housing price index for CT, it has not risen above its housing bubble nadir. New York looks very similar with a very slight rise over the past year. If you compare CT and NY to AZ, you will note a huge difference in what has happened to the house price index since the Great Recession.

  2. They are once you get out of the NYC area the housing prices have come down alot. I'm currently looking for a house and my top end price of 85k would have bought a dog house a few years ago but now I looking for move in ready condition houses for that price. (still hard to find one with all the wife and i want at the price though hence the still looking)

  3. Very interesting and solidly thought out, but to make all this even a bit more murky is the situation facing the younger generation. The generation that is now beginning to retire has leveraged its size into favorable policies that it will enjoy in later life. An American born in 1945 can expect nearly $2.2m in lifetime net transfers from the "state" far more than they pay in, and far more than any previous group.

    A study by the International Monetary Fund in 2011 compared the tax bills of what different age citizens pay over their lifetime with the value of the benefits that they are forecast to receive. The boomers are leaving a huge bill. More about the heavy burden we are placing on future generations in the article below.


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