Demographic Headwinds for Housing
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Boomer demographics and postponement of marriage on account of student debt and poor finances are two of the key reasons that I long-ago stated the housing recovery would be slow for a decade.
Declining birthrates now show that is indeed what is happening.
First, please consider a short snip from my July 25 post "Actual" New Home Sales First 6 Months of 2012 vs. Prior Years; Reflections on the Housing Recovery:
Reflections on the Housing Recovery
Even with today's reported decline, new home sales have likely bottomed on an annual, cumulative-total basis.
However, don't expect much in terms of recovery. Debt overhang is immense, and student debt is particularly problematic. Lack of jobs coupled with high student debt is capping family formation. Kids out of college are deep in debt and holding off getting married, starting families, and therefore buying houses.
Moreover, home sizes will trend lower and price recovery will be anemic because of boomer demographics. Retired boomers looking to downsize have few buyers able or willing to buy.
Bank-owned real estate (REOs) and shadow inventory are hugely underestimated. That too will pressure prices and sales.
The good news is home sales will add to GDP.
The more realistic news is structural headwinds are immense, demographics are poor, and job prospects for college graduates are poor. The bottom in new home sales may be in, just don't expect anything close to a normal housing-led recovery, because it's not going to happen.
Twenty-Somethings Postpone Having Babies
USA Today picked up on that theme in their article Americans put off having babies amid poor economy:
Twenty-somethings who postponed having babies because of the poor economy are still hesitant to jump in to parenthood — an unexpected consequence that has dropped the USA's birthrate to its lowest point in 25 years.
As the economy tanked, the average number of births per woman fell 12% from a peak of 2.12 in 2007. Demographic Intelligence projects the rate to hit 1.87 this year and 1.86 next year — the lowest since 1987.
The less-educated and Hispanics have experienced the biggest birthrate decline while the share of U.S. births to college-educated, non-Hispanic whites and Asian Americans has grown.
The effect of this economic slump on birthrates has been more rapid and long-lasting than any downturn since the Great Depression.
Many young adults are unemployed, carrying big student loan debt and often forced to move back in with their parents — factors that may make them think twice about starting a family.
"The more you delay it, the more you delay the possibility of a second or third child," says Stephanie Coontz, director of research and public education at the Council on Contemporary Families. "This is probably a long-term trend that is exacerbated by the recession but also by the general hollowing out of middle-class jobs. There's a growing sense that college is prohibitively expensive, and yet your kids can't make it without a college degree," so many women may decide to have just one child.
Unexpected by Whom?
I am amused by the phrase "unexpected consequence" in the opening paragraph of the above article. I have to ask "unexpected by whom?"
Flashback January 11, 2010: Reflections on Boomer Demographics, Household Formation, the Hoax Economy, Dead Batteries.
Effect On Household Formation
Think of the effect on household formation if people under 30 will continue to suffer disproportionately higher joblessness. How pray tell will student loans be paid back let alone anyone start buying homes?
We will not only have structurally high unemployment for a decade, but we will have structurally low household formation. More people in their early to mid-30's will be living at home, sharing homes or sharing apartments.
The impact on home prices and demand for goods to furnish those homes is surely not priced into any existing economic models on housing starts, home prices, or the stock market.
Harsh Reality of Structurally High Unemployment
2010 was not the first time I used student debt, household formation, and structural unemployment in that context.
Indeed, my post Structurally High Unemployment For A Decade dates back to August 18, 2009. Here is a key snip.
In the Incredible Shrinking Boomer Economy I noted a harsh reality quote of Bernanke:
"It takes GDP growth of about 2.5 percent to keep the jobless rate constant. But the Fed expects growth of only about 1 percent in the last six months of the year. So that's not enough to bring down the unemployment rate."
Pray tell what happens if GDP can't exceed 2.5% for a couple of years? What about a decade (or on and off for a decade)?
If you have come to the conclusion that we are going to have structurally high unemployment for a decade, you have come to the right conclusion.
Economists were surprised by that chart but they should not have been. If anything, the surprise should have been that it's not worse. Looking ahead, it probably will be.
Originally posted at Mish's Global Economic Trend Analysis
(c) Mike "Mish" Shedlock
Investment Advisor Representative