Housing Swings: Demographics and Interest Rate Trends Provide a Mixed Bag of Residential Forecasts for the 1990s

By Peach, Richard W. | Mortgage Banking, June 1990 | Go to article overview

Housing Swings: Demographics and Interest Rate Trends Provide a Mixed Bag of Residential Forecasts for the 1990s


Peach, Richard W., Mortgage Banking


HOUSING

Surveys of American households have found homeownership, right up there along with a happy marriage and a good job, on the roster of things that represent success or the so-called good life.

Obviously, homeownership offers many psychological and financial advantages. Among those advantages is the fact that in most cases, homes have proven to be a good, long-term investment. In addition to providing shelter and certain tax advantages, during the past several decades homes have appreciated at or above the overall rate of inflation.

When combined with the fact that most home purchases are relatively highly leveraged, homeownership has paid substantial returns on equity. As a result, housing has come to be viewed as a good vehicle for storing and accumulating wealth.

However, during the past year, a major debate has emerged as to whether or not homeownership will continue to be as good an investment during the next two decades. Many articles have appeared periodically concluding that home prices have been bid up as a result of pure speculation. These authors have always maintained that the speculative bubble is about to burst. Such articles were being written 15 years ago, if not earlier, and quite correctly have not received serious consideration.

The current debate, however, is qualitatively different. It involves the work of two economists from Harvard University. N. Gregory Mankiw and David N. Weil have conducted a study that concludes that during the next two decades home prices are likely to fall 40 to 50 percent in real (inflation-adjusted) terms. The study is titled, "The Baby Boom, the Baby Bust, and the Housing Market," and was published in December 1988. Substantial media attention has been focused on this study and its findings. Some real estate industry leaders have attributed the current slow pace of home sales to the coverage garnered by this study. According to Mankiw and Weil, movements in the real price of a new single-family home during the post-World War II period are explained primarily by changes in the age structure of the population. In the first section of their paper, they analyze data from the 1970 Census of Housing to determine how an individual's demand for housing varies by age. Their analysis suggests that a person's demand for housing is relatively low and stable until about age 20. Housing demand then rises sharply between the ages of 20 and 30. It increases at a slower rate between the ages of 30 and 40 and then gradually declines from age 40 onward. These results were then used to estimate aggregate housing demand during the period from 1946 to 1986, using Census Bureau estimates of the number of people in each age category during each year of that period.

It's been well documented that the baby boom generation is moving through the age brackets that comprise the American population like a "pig in a python." By the beginning of the 1970s, the first wave of baby boomers entered the 25- to 34-year age group--an age when housing demand typically soars. During the 1970s the number of people in this age group increased by nearly 50 percent. (See Chart 1). However, during the 1980s the growth of 25- to 34-year olds slowed to about 17 percent. During the 1990s, the number of people in this age bracket will actually decline about 15 percent. It is then projected to remain essentially unchanged during the first decade of the next century.

This aging of the baby boom generation has resulted in dramatic changes in the estimate of housing demand offered by Mankiw and Weil. The economists conclude that this type of demographically derived housing demand alone explains the changes in the real price of a new, single-family home.

For example, the surge in the number of 25- to 34-year olds during the 1970s, they argue, resulted in a surge in housing demand, pushing real home prices up 26 percent. (See Chart 2.) The slower growth of this age group during the 1980s resulted in a marked slowing of the growth of housing demand. …

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