No Place Like Home

August 29th, 2012

by Eric Schaefer

Home. There are few other more evocative and comforting words in the English language, or, in any language for that matter. The mention of home unleashes a flood of emotions and thoughts. Home may be an ideal, but it is also a place. Among our possessions, our house is our home. Few other worldly goods, no matter what socio-economic we count our self amongst, enjoys the same pride of place.

As Americans we hold house and home in a special regard. Perhaps this is because we believe it every person's right to own the roof over his/her head. Maybe it is because we are an immigrant nation: our house is proof certain we have arrived and are at last home. House and home has special meaning for us despite the United States ranking only tenth among wealthy industrial nations in home ownership. Greece, Spain and Ireland are all ahead using this measure of affluence.

So, it should come as no surprise that we view the state of the residential housing market as a barometer of our wealth and worth. Since the housing bubble burst in 2008, sales volumes have plummeted and asking prices have fallen. Housing starts and permits may be edging higher — compared to the depressed levels of 2010 — and the inventory overhang in existing homes for sale has been winnowed down, but we remain far from the normal pace of activity, let alone the inflated volumes and advances of the boom years.

Much as we hope for a rapid recovery, we must acknowledge that reports of a revival in residential housing are premature. Yes, a bottom of sorts is forming. But, key demographic trends — which ultimately drive demand for housing — give pause for caution, countering the view that a recovery is just around the corner.

Since 1961 the rate of household formation has averaged 1.6 percent per annum. In comparison, the rate from 2007 to 2011 slowed to an anemic 0.6 percent per year. The years 2008, 2009 and 2010 witnessed the slowest growth (save for 1990) over the last fifty years.

The graying of the Baby Boomers is one explanation. 1970 to 1995 were the peak years for Boomers setting up their own households. This age bracket bulge is now pushing higher the proportion of households headed by someone older than 45. The Census Bureau reports the median age of the household head is 50.1 years; twenty years ago it was a more spry 45.3 years. Unless there is a surge in immigration, or a boost in the fertility rate, a graying population generally translates into declining demand for new housing.

Easing this demographic shift should be the emergence of the Millennial generation. Ask any parent with children applying to or attending college and they will apprise you of the sheer number of Echo Boomers — or, the children of the Baby Boomer generation. The Census Bureau estimates there are almost 64 Million Americans between the ages of 20 and 34, or, roughly 20 percent of the entire U.S. population. By their sheer numbers there is demand. The problem is their purchasing power is constrained by student loan debt ($903.6 Billion today versus $506.4 Billion five years ago) and higher rates of unemployment. For 16 to 24 year olds, 16.4 percent are without jobs; for 20 to 24 year olds — a cohort including recent college graduates — the unemployment rate is 13.5 percent. For all age brackets, the combined rate as of July is 8.3 percent.

No wonder a number of Echo Boomers, saddled with debt and struggling to find work, have opted to reside with their parents, generating another euphemism, boomerang kids, to describe this trend. Without meaningful prospects, Millenials have no choice but to defer marriage, home ownership and starting families. Whoever prevails in November must figure out how to not just unfreeze the housing market but to create the same opportunities their parents enjoyed to allow Millenials a house to come home to.

Notes on Sources and Methods:

Total households in the United States was obtained from the Census Bureau's Family and Living Arrangements Survey (Table HH-3). The survey also provides a breakdown of U.S. households by the age of the head of the household.

(Source: Census Bureau; Bureau of Labor Statistics; AIFS estimates.)

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