Generational Housing Bubble?

As if the current severe housing market correction were not enough, a new paper by Dowell Myers and SungHo Ryu posits that the short-term problems will be overshadowed by a "generational housing bubble" as baby boomers continue to age. This report has been given prominent attention in media such as the Wall Street Journal and the Economist.

Myers and Ryu make estimates of the rate at which people in different age brackets bought and sold homes during 1995-2000, and report that among the population up to age 65 there were more purchases than sales, but beyond that the "sell rate" exceeded the "buy rate."  Given the impending shift in the age distribution, they extrapolate from that to a glut in housing supply.  Although the article in the Journal of the American Planning Association is more nuanced than the press reports drawn from it, it is still misleading.  It indicates that a major shift is imminent and that it will occur because boomers will "retire, relocate, and eventually withdraw from the housing market."

Sales by homeowners age 60 and over in 2000 were estimated by comparing their numbers to the numbers of owners from the same cohorts in 1990, using the difference as "a measure of all the home sales that were not followed by purchasing another home, but by renting, moving to a retirement home, or death."  It is that last component that undoubtedly accounts for much of their estimate. In a key chart with the vertical axis representing persons in each age group buying and selling, the scale ranges from zero to six percent, and the "sell rate" soars off the chart for those aged 80 and over. The caption says that "8.8 percent of persons 80 and older sold homes each year."  In that context, "sold" is a euphemism. In fact, according to data from the National Center for Health Statistics, more than 11 percent of persons 80 and older died each year during that period.

As I found when I looked at this subject in 1996, most older homeowners don't move, and if they do they are unlikely to become renters, move in with their children, etc.  Indeed, they were more likely than younger movers to buy newly-built homes. In connection with a presentation I gave in April 2006, I noted reasons to expect that the leading edge of the baby boom would be even less likely to opt out of home ownership in the near term.

Extensive and thorough analysis of housing demand among the older population may be found in a series of articles about housing wealth written over the course of two decades by Steven Venti and David Wise.  The most recent paper that I have was written in 2001.  They found that "in the absence of a precipitating shock--death of a spouse or entry of a family member into a nursing home--families are unlikely to discontinue home ownership.  And even when there is a precipitating shock, discontinuing ownership is the exception rather than the rule."

There will be a negative effect on housing demand from the passing of the 1946-1964 baby boom, but it won't be soon or sudden.

January 27, 2008 -

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