The housing market has been in bad shape for five years now, and there are many indications that things aren't going to get better anytime soon.
Some market observers argue that things could get worse, because of a major demographic shift under way.
The oldest of the baby boomers — the generation of 78 million Americans born between 1946 and 1964 — have already turned 65. As the generation continues to age, some warn that there won't be enough Americans around of working age to buy all their houses.
"Older people are a ticking time bomb for the housing market," says Dowell Myers, a demographer at the University of Southern California. "What we've gone through recently could be nothing compared to what we have five years from now. When the boomers start to sell off their houses, there are going to be too many boomers and not enough buyers."
When the boomers start to sell off their houses, there are going to be too many boomers and not enough buyers.
The aging of the boomers has been a matter of concern for the real estate industry for a long time. But some within the industry say that Myers' warnings of a "generational housing bubble" are overblown.
The boomers will not be leaving their homes all at once, suddenly flooding the market. And the housing preferences of younger Americans have yet to be determined.
More traditional factors, such as availability of credit, will ultimately be more important in determining price growth than demographics, says Celia Chen, a housing economist with Moody's Analytics, an economic research firm.
Multiple Factors At Play
Two prominent economists, N. Gregory Mankiw and David N. Weil, published a paper back in 1989 that received a significant amount of media attention. Because there would be fewer buyers in the "baby bust" generation that followed the baby boom, they predicted that housing prices would fall by 3 percent a year between 1987 and 2007.
In fact, prices went up by 3.5 percent annually over that period, according to the Federal Reserve Bank of San Francisco. The housing bust has come since.
Despite the fact that things didn't play out as he once predicted, Weil, an economist at Brown University, maintains that "demographics affect the housing market. We know they have to. But that effect is probably small, relative to other factors that are moving the market around."
Like Chen, Weil says that factors such as interest rates, wage growth and expectations about whether housing values will appreciate are more important. "Amidst all those big forces, demographics is kind of this gentle tug," Weil says.
Conflicting Trends
Not everyone can agree on which way demographic trends will be tugging the housing market. The U.S. population, on average, is aging. But it's not aging as fast as other countries such as Germany, Italy, Spain and Japan.
The lesson from those countries is that household size starts to shrink as the population ages. If a country goes from an average household size of 2.5 people, say, to 2.1 people, that leads to a considerable demand for new housing, says Paul Hewitt, the former director of the Global Aging Initiative at the Center for Strategic and International Studies.
Smaller average households mean that the same-sized population is going to need more housing units. "I would think that household formation will substantially exceed supply," Hewitt says.
Or Maybe Larger Households?
But the experience in Europe and elsewhere may not be replicated in the United States. Some social scientists are predicting that average household sizes in the U.S. are going to grow, despite the aging population.
That's in part because more adult children are "boomeranging" back home with their parents. It may also be the case that, as the number of Americans past the age of 85 continues to grow, grandparents may be at the center of more multigenerational households.
In addition, the population of school-age and working-age Americans is increasingly made up of members of ethnic and racial minority groups. "There appears to be a greater likelihood that Asians and Hispanics will have multiple generations within the household," says David Crowe, chief economist for the National Association of Home Builders.
All that lends hope to the industry that there will be buyers for the four-bedroom houses out in the suburbs that the boomers will, eventually, be relinquishing. "We're going to have to find some way to fill the cookie-cutter homes now gathering weeds in the Phoenix suburbs," says Mike Larson, a real estate analyst at Weiss Research, an investment firm in Florida.
Back To The City
I would think that household formation will substantially exceed supply.
Larson notes that the prevailing model in American housing over the past couple of decades — bigger and bigger houses farther out from job centers — has gone out of style. With gas prices occasionally touching $4 per gallon, more people prefer to have shorter commutes and be closer to transit and cultural amenities.
"Through this whole housing debacle, it's the center cities that have held up better because of the benefits of living near work," says Chen, the Moody's economist.
That enters into the mix of concern about whether there will be buyers for houses currently occupied by aging boomers. "The houses they own are obsolete because of changing tastes and preferences," says Phillip Longman, a demographer at the New America Foundation.
"The elderly of the 1960s were all caught in the inner city," he says. "Now, we've got the elderly trapped in the suburbs, while the young people are moving to the cities."
'Echo Boom' Preferences
Changing tastes is what really has people in the housing industry worried.
It's not that there won't be enough people around to buy houses. "The echo boom" — the cohort of children born to baby boomers between 1980 and 2000 — "is as big or bigger than the baby boom, in terms of numbers of people," says Paul Bishop, vice president of research at the National Association of Realtors. "The oldest of them are entering the prime buying years."
But today's young adults have seen housing prices stagnate for long enough that they will be very cautious about buying a home, Bishop says. Putting aside the question of whether they'll want to buy the big houses the boomers will be vacating, the echo boomers' perceptions about the value of homeownership itself may be different than their parents' generation.
"We're on the cusp of some changes going forward, but not because the boomers are going to sell their houses en masse," he says. "The echo boomers have seen a lot of calamity recently in the housing market, and that will certainly have an imprint on their views going forward."
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