It’s not too hard to guess at the general direction of home prices in the near term. In the San Francisco Bay Area, for instance, with low inventory, a huge surplus of buyers with great salaries and stock options, and multiple bids on almost every property, it’s safe to say home prices are still going up – for now.
But what about five years from now? For that we have to look at demographics, and project who will be buying homes in five years and how they will pay for it. (The demand for anything, including housing, is determined by the desire of the typical buyer for that item and their ability to pay for it.) For an historical example, businesses have done very well in the past catering to the huge surge in population known as the Baby Boomers, and still are, even though we are hardly babies anymore.
Take a look at the graph to the right. The red line shows the population of 20 – 29 year-olds and 30 – 39 year olds over time, as measured by the BLS. Let’s look at the blue line (we’ll call them 30-somethings) first. You’ll notice that the population of 30-somethings peaked in the early to mid ‘90s, just as – you guessed it – the peak of the baby boomers was turning 40, or aging out of the demographic.
The next “baby boom” began in the early ‘80s (because boomers were having babies) so you see this demographic begin to rise again 30 years later.
The red line represents 20-somethings, who predictably started rising 10 years before the 30-somethings did. You’ll notice that there is not an exact correlation, because population growth comes from multiple sources, not just births.
Why is this important? Historically 20-somethings rent, and 30-somethings buy. There are factors that interrupt this trend in the short run, but overall it’s a good predictor of housing demand down the road. Will there be buyers?
Why has the rental market been so strong in the last few years? It was due partly, of course, to the influx of new renters who lost their homes in foreclosures, but that was a “net zero” event. In general, each family needs a home so if they no longer owned, they rented. There was some temporary consolidation of households during this period (“Mom, Dad, can I put a heater in your basement?”) but in the long run that trend too is reversing.
So, today we have a huge surge of 20-somethings who are renters, as 20-somethings invariably are. In ten years this same group will be 30-somethings, and in five years half of them will have moved on. You’ll notice that in about 2020 the population of 20-somethings will peak, and decline and stay flat for the next 18 years. This is significant, as it tells us that demand for rental units could be flat for many years starting in about 2020.
At the same time, look what happens to the population of 30-somethings from 2020 on. This prime first-time home-buying population will increase by 10% from today through 2021, another 10% by 2027, and up from there. I’m not worried about housing prices in 2060 because I’ll be…well, dead.
There are other factors that determine whether this demographic will buy in their 30s or not: stagnant wages, high student loan debt, a need to remain mobile for job transfers, and an overall disillusionment with real estate may suppress the effect of the growth of the demographic. But 4 million new 30-somethings by 2020 will almost certainly have some impact.
Real estate has never been a get-rich-quick investment, except for certain anomalies in time. It’s an amazing long-term hold investment, however, as home prices rise. Something tells me it’s time to buy and hold.
This data is culled from the Calculated Risk Blog by Bill McBride – arguably the best housing economist in the country today. You can watch an interview with him by Bloomberg News here. For excellent economic analyses, read the Calculated Risk Blog.