Tuesday, January 31, 2006

Demography is Destiny

In the long run the demand for housing is driven by demograhic factors including household formation and incomes.

On an inflation-adjusted basis household incomes in the US have increased substanstially and fairly steadily for many decades. To get a closer look household income distribution is divided into five 20% bands. Using this data we find that incomes have increased at a faster rate for the upper bands than for the lower bands.

The data is presented on a nominal (current dollars) and inflation-adjusted (2004 dollars) basis on this Census bureau web page: http://www.census.gov/hhes/www/income/histinc/h03ar.html

Note that real income has increased substantially in every income band over the decades through 2000 or 2001, and then slipped a little in the last few years.

Housing prices are heavily driven by the upper income bands. Generally, the middle band is the source of first-time buyers, while the upper bands are the trade-up buyers and second home buyers. The bottom two bands are predominantly renters.


But what about the future real demand or real need for housing?

By looking at population distribution by age we can forecast the real housing demand for many years into the future. Here is a graphic display of population by cohort:
http://www.nationmaster.com/country/us/Age_distribution

Note the steady increase in the forecast of adult population in the coming decades. This is not speculation – the people are already born for the 2020 forecast. If you slice this data carefully and evaluate the propensity to own by age cohort, the result is not only a rapid rise in household formations in the next 10 years but also a strong rise in expected homeownership through the next 20 years.

However, none of this precludes cyclical downturns.

For the benefit of housing demography buffs with insomnia, here is a Census report that gives some interesting perspective on population trends.
http://www.census.gov/prod/2002pubs/censr-4.pdf

6 Comments:

At February 01, 2006 1:21 PM, Anonymous Anonymous said...

Interesting demographic charts at NationMaster. Looks like a rodent passing through a snake.

Good links, good analysis.

The housing market? Minor downward trend in the range of 3% to 6% per year in the hot spots only, for ~ 3 years, then trending up. No national decline. I imagine I'll be buying again in 2010 here in coastal CA.

 
At February 01, 2006 9:53 PM, Anonymous Anonymous said...

Interest rates and unemployment will tell the tale. If those spike, watch forclosures. If rates and employment stay steady, watch the paint dry.

 
At February 01, 2006 11:59 PM, Blogger zephyr said...

Fewlesh,

Large stress when concentrated has a more disruptive effect than the same stress when spread widely. I agree with your friend’s assessment that the risk of system collapse is much lower now than in the past, if faced with the same magnitude of stress.

However, my point about the bank failures etc. in the late 1980s is that the stress and damage then was greater than what we have seen in this cycle. So far we have not reached the same level of stress on the system, as evidenced by the lack of such failures to date. It could happen. I am not saying there is nothing to worry about – only that it was worse last time.

You say that “Unfortunately, this time around, we have Freddie Mac and Fannie Mae...” You imply that their presence is a new negative factor. However, they are not new at all. They were part of the last cycle peak, and have been around for decades. Their system withstood the stress of the 1990s bust.

The fear of Fannie Mae and Freddie Mac as a market destabilizing factor is misplaced. It would be more accurate to observe that the mortgage market is at less risk today because the system that they provide is less vulnerable than the other alternatives. Their increased market share has been favorable to stability.

 
At February 02, 2006 11:02 PM, Anonymous Anonymous said...

Interest rates and unemployment are leading, not a lagging indicators for housing in my opinion. I believe Zephyr and I may disagree on the effect interest rates have on the housing market, but in my experience there are very few things that can stop sales NOW like a steep rate increase. Stated another way, the housing industry (NAR, BIA et al) are fearful of rising rates like little else, save employment.

The mortgage rate graph at the bottom of this page shows where rates were during the last corrections in '80 and '90. I'm not saying a causal relationship exists, but I do say rates play a leading role, among others.

http://mortgage-x.com/trends.htm

As to unemployment, obviously if many folks lose their jobs (as they did in L.A. in the early 90's), homes in forclosure will follow, making it a leading indicator.

Re: bond yeilds, the flat or inverted curve, etc.: That is not an area that I know enough about to speculate on.

http://www.martincapital.com/chart-pgs/CH_yldcv.HTM

I don't much care or follow what bonds etc. are doing or trending. Bores me rigid. Personaly, my money is made from business ownership and invested either in expansion, new ventures, real estate, or a "balanced" portfolio of stocks and bonds etc.

The portfolio has always been by far the lowest performing element of my investments. By far. Yet it is also supposedly the least risky. But I digress.

 
At March 15, 2006 12:01 AM, Anonymous Anonymous said...

You really should either up-date this blog or put it out of it's misery, old chap.

 
At March 20, 2006 10:22 PM, Blogger zephyr said...

Anon: This site is not meant to be an active discussion board - nor is it a daily brain dump like so many others. I am not looking to be a news source or an aggregator. I post only occasionally and only regarding what I feel are key issues.

 

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