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The twin lost decades in housing and stocks
10,000 baby boomers are retiring per day. This two decade trend has only started but will certainly have an impact on the housing situation moving forward. In most economic reports the boom and bust of the housing market was not factored into the equation. Many boomers will downsize or sell as they age. This is just a matter of demographics. While trends are harder to predict, we know that 10,000 baby boomers will be retiring on a daily basis for well over a decade. What does this do to housing? The challenge we will face is that the younger home buying generation is less affluent and more in debt prior to purchasing a home. Instead of growing households, we saw over 2 million young adults move back home to live with their parents. So much for household formation taking up all that excess demand. The recipe for the moment has been to constrain inventory and artificially push rates lower but this has done very little to increase actual financial security. What happens when millions of baby boomers retire?
Home ownership rate by cohort
The recent major Census report shows one clear thing. Home ownership is dominated by older Americans:
The big changes can be seen when looking at the trend from a much higher perspective:
1980 home ownership rate
15 to 24: 22.1%
25 to 34: 51.6%
65 years and older: 70.1%
2010 home ownership rate
15 to 24: 16.1%
25 to 34: 42%
65 years and older: 77.5%
The home ownership rate from those 15 to 24 and 25 to 34 has declined substantially over this time while the 65 year and older group has seen their home ownership rate increase. The good news is that nationwide home values have fallen dramatically yet in many large metro areas home prices are still inflated. Bubbles do not deflate uniformly.
The twin lost decades
People have a hard time imaging a lost decade for the US but we have just experienced that with housing and the stock market:
Both home values and stock values are back to levels last seen over a decade ago. Economists and financial analysts have built models with stock markets returning 7 percent almost on a continual basis. Yet for housing, Professor Shiller went back to the 1800s and found that housing prices essentially only kept track with inflation. Stocks? Do we have a long-term model where many multi-national corporations make money from their businesses abroad? Why can someone assume the stock market will return 7 percent after adjusting for inflation in a dynamically different world?
As baby boomers retire, their stock portfolios look very much like they did a decade ago (assuming they even saved and data suggests very few even did). Most Americans have their wealth stored up in housing. And housing is still near a trough. Part of the low inventory also comes from many Americans unable to sell their homes because they are flat out underwater.
Underwater home owners
It should be clear that the bulk of home owners come from the older cohorts. Many of these are actually in negative equity positions:
11.4 million (23.7 percent) of homeowners are in a negative equity position. That is, you have a large segment of our home owning population that simply cannot sell without losing money, and this does not factor in the standard 5 to 6 percent selling costs. So many baby boomers are simply staying put if they can. It was interesting but not surprising to read the following:
“(Bloomberg) When Bank of America Corp. sent letters to 60,000 struggling homeowners offering to slice an average $150,000 off their loans, the lender got an unusual response from most of them: silence.”
So why would someone not respond to a $150,000 reduction on their mortgage? Well if you are in Nevada and bought a $500,000 home that will now carry a $350,000 mortgage but is worth $150,000 is this even worth your time? Can you even afford the lowered price? Many obviously cannot as indicated by the foreclosure rate. So the foreclosure pipeline is still healthy and full yet leaked out inventory looks better because:
-1. Banks are selectively leaking out properties
-2. The 11.4 homeowners in negative equity keep supply low as well (many may like to sell but cannot)
-3. Household formation has slowed so less demand on more expensive homes (competition from echo boomers and boomers can be strong because of low inventory in some locations)
Yet the low inventory is more of a symptom of dysfunctional housing market. The baby boomer home selling trend is going to have a big impact. Much of the analysis we see assumes that the new home buying generation is basically going to replicate the trend that the boomers did. Why should we assume that? There are a few things that have changed after WWII:
-1. The massive stock bull market. After WWII with many industrial countries in ruin, the US had a major competitive advantage in nearly all economic sectors ushering in multi-decades of prosperity. Look at the stock market chart above. The world has become more competitive and wages for Americans have been stagnant for well over a decade. This is support for lower home prices not expensive home values.
-2. Home buying on one income. It was feasible for many blue collar one income households to purchase into the American Dream. That is now tougher for many and virtually impossible in expensive metro areas. Blue collar work has been on a major off shoring trend. In expensive markets you need two professional incomes just to buy a decent home.
-3. Global debt bubble. Never in our history has there been so much debt both at the government and individual level. We are living through a major de-leveraging event.
-4. Multiple jobs with little security. While many boomers had guaranteed job security with one company and many times pensions, many younger Americans will have multiple jobs/careers over a life time. Many are looking for mobility and many do not have home buying as part of their future plans (certainly not at levels like that of the boomers).
You have a wealthier generation that has seen their wealth decline trying to sell to a less affluent and smaller generation. Instead of household formation or even renting, over 2 million young Americans moved back home. Is it any wonder why we have now faced a lost decade in housing?
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This is why it is so confusing about real estate. What do we do when we need to buy a home? At what price?
What to do?
Multigeneration housing is gonna happen - does this mean housing prices will eventually flatline and stay down? L shape?
I am going to be watching a house two doors down from me. It got foreclosed on last year, and sold for the exact same price the original owner paid for it in 1989, $89,000. It appears to have been bought by a couple two months ago, who are doing a heck of alot of work on the place without moving in. I suspect they are doing major renovations, and are going to try and flip it in the near future. Over 2200 foot two story. Always fun for the air conditioning and heating bill.
A lot of work going on inside, new roof, new exterior, what looked like granite counter tops going in through the front door last week. WooHoo! [/sarc]
Flippers are alive and well in Oklahoma. ;-(
Housing is screwed forever. With our demographic situation (boomers need to sell, youngers will not be buying); and the huge inventory being held back; and the millions of foreclosures still to come; difficulty getting home loans; taxes going up (most definitely property taxes); and all the other factors causing deflationary downward pressure on asset values... housing is toast. Appreciation will become a archaic term for housing. Just like the Great Depression, after housing hit bottom, prices just flatlined for almost 20 years and didn't start to climb until the 50s. I'm 60 now. Don't think I'll ever see home appreciation in my lifetime again. The idea of a primary residence being an investment is warped and ridiculous, and... gone.
Housing is screwed forever. With our demographic situation (boomers need to sell, youngers will not be buying); and the huge inventory being held back; and the millions of foreclosures still to come; difficulty getting home loans; taxes going up (most definitely property taxes); and all the other factors causing deflationary downward pressure on asset values... housing is toast. Appreciation will become a archaic term for housing. Just like the Great Depression, after housing hit bottom, prices just flatlined for almost 20 years and didn't start to climb until the 50s. I'm 60 now. Don't think I'll ever see home appreciation in my lifetime again. The idea of a primary residence being an investment is warped and ridiculous, and... gone.
Virgil, in the Aeneid tells us that once we go wrong we find it very difficult to get back on the right track: hoc opus,hic labor est, or "this is the tough part"
Well, it is all tough now. None of the big brains have an answer, they're just playing for time and planning their escape. It is going to be for generations to come a living hell on this Earth.
I suggest embracing the late Malcolm Forbes' epitaph,...... "While alive he lived" , because when the bough breaks hundreds of millions. perhaps several billion will perish.
If people can be sold the notion of eternal life, selling a 30 year mortgage [with a house thrown-in for good measure] is a piece of cake. People will by anything.
Next time around, let's try to live off of what we earn. Cash only. A starter home for 5K wouldn't be such a bad thing.
And while we're at it, how about an $800. car!
These bankers and their serf-society need to be sent packing.
"What can be added to the happiness of a man who is in health, out of debt, and has a clear conscience ?"
-- Adam Smith.
The Theory of Moral Sentiments, 1759.
A great man, a terribly overlooked work of his, but it's clarity is brilliant.
It's too bad time is not on our side. This we learn from Ovid in Metamorphoses; "tempus edax rerum" ...Time, the devourer of all things.
It is a truth universally acknowledged, that a single man in possession of a good
fortune must be in want of a wife.
-Jane Austen
This is axiomatic. We've known this for quite a long time, as demographics can be a bitch. Only Ben can prevent collapses in both. I am sure he will try. Rev up the presses!
Another excellent post by Dr Housing Bubble. Thanks ZH for including him.
A very good post. Demographically and financially we are in an upside down pyramid but it's still a ponzi. In a regular Ponzi pyramid, you would try to fleece money from the many at different levels to enrich the few at the top. In the upside down pyramid, the top layers are trying to fleece money from the bottom layers but there isn't enough people and money in the bottom layers to take care of the broad base of people at the top. So either way you get a collapse.
Very similar housing and stockmarket issues in the UK for our version of babyboomers.
In fact. what is unusual is the near 70% level of home ownership in the UK that has been created since WWII. In the early 1900s teh level of UK homeownership was less than 30% and 70% rented. We will return to that level again. Houses will once more become something to live in and not a source of investment returns other than for professional landlords and investing institutions. It makes no sense for a workforce that needs to be flexible to buy bricks and mortar for a few years before selling up to take a job elsewhere.
Surprised some savvy real estate agents aren't advertising "clear title" in their ads yet. Then again, there are probably so few that perhaps those would be they're only sales. Might be a good selling point for a For Sale By Owner someday though. Don't hear too much talk about this being a reason for low sales though. MUMS the word? LOL.
Funny you say that I thought the same thing.
I asked my mortgage banker about MERS and if she had any "funny" titles issues and she looked at me like WTF are you talking about. Same reponse from the re broker. WTF is mers?
hehe
oh well I am jumping in. I think I'd rather have my money in property than sitting in the bank. That's how I sold it to myself.
>>Surprised some savvy real estate agents aren't advertising "clear title" in their ads yet.<<
Don't know about RE agents, but at my suggestion my dad put "clear title" in the ad for the Fla. condo he's been trying to sell since 2008 (which I told him to sell in 2006 but who ever listens to their kids, right?) Two viewings a year, no takers and it's priced, as they say, to move.
OUCH!
A home is now more of tax liability than anything.
everyone is against 'taxing wealth' . well what the fuck is property taxes on your home?
personally i think property taxes should be abolished on ones primary residence. NO property tax on your home. period. how about that shit?
The government actually allow their renters to really own the land? They'd be afraid we'll be declaring our quarter acre lots sovereign nations. sarc/
Fuck that. "Home Ownership" is the sure way to serfdom. Mark my words.
A primary residence was never supposed to be an investment. That was marketing and propaganda by banks and government.
Housing is a liability. Why?
Whether you have a lease or own it, as long as you hold it on your personal balance sheet, you have to pay insurance, property taxes, and maybe debt. Even if you own your primary residence 100% equity with no mortgage debt, you still have to pay insurance, property taxes, and maintenance expenses.
You never trully own a home and pay nothing. Hence, it should be viewed as a liability. More so if you rent your home you are made aware of the costs on the first of each month.
A home is an investment only if you own it and rent it out to someone else as their primary residence at a profit. Then you have an investment.
I resent it the idea that wealth has been destroyed in the housing market because it perpetuates the fallacy that a primary residence was ever an investment.
+100
Assets produce income. However, if owning a home is cheaper than renting, it could be considered an asset. One has to add up all the expenses properly though.
We live in the age, in which liabilities are sold as assets, raping of the environemnt is called consumption, hazardous foods are labeld as essential nutrition, lies are told as truth, endless wars are portrayed as eternal peace, serfdom is described as freedom, doctrination is sugarcoated as education, endless debts are showcased as perpetual prosperity. This is the worst time of the human history. Period.
Owning a house outright is awesome. Sure you have to pay for maintenenance, property taxes and optionally insurance, but it still cost way less than renting.
How do you get thumbs down for that. Landlords make a profit.
If you mean 6-10% being way less.
For many Americans, the view of the world or things around them is always polar.
yes, housing is in a long term funk.....however, there are 1.5 billion chinese ready to buy the bargains.....america is on the verge of becoming a chinese colony in fact.
I remember getting interested in demographics for investing about ten years ago via a Harry S. Dent Book. Ofcourse that ass-clown also forecasted the dow at some insane level like 40,000 by 2010.
So while I think the sentiment is right on ( I frequently remind people "who is going to buy boomer's million dollar homes if not the Chinese?") I am not sure it gives you a whole lot of actionable numbers for forecasting. You just know housing will be sh&tty from a captial gains /use my home as a piggy bank sort of way. However, that doesn't mean that cash flow investors might not do all right as Cap rates have gone up.
The other thing I will say about the lost decade in the equity markets is that it wasn't a lost decade for dividend investors as many of them got a decent return on their money during that time.
Its time people stop thinking they can all get rich overnight in some fantabulous new investment and go back to investing fundamentals and learn about discounted cash flows and other such bedrocks.
In 1930 those huge boomer houses were divided up to make boarding houses. Given a proper zoning change we'll be doing it again.
>>Its time people stop thinking they can all get rich overnight in some fantabulous new investment and go back to investing fundamentals and learn about discounted cash flows and other such bedrocks.<<
I agree with the basic sentiment, but (speaking as someone who's been in the game since 89) I think it's too late for either approach. The markets are too corrupt at this point to have any confidence that they'll even be there, much less function properly in the time frame you're suggesting. Besides, in financial terms, most people today can't see beyond the end of next month, much less plan years in advance. Stocks are much like houses in the sense that somewhere down the road there has to be a buyer to take out your position. So where's the next buyer? Or to put it at different way, how much discounted cash flow do you need to offset a minimum 50% decline in asset prices, because that, IMO, is where we're headed. Factor inflation into that, plus the realization that dividends can be cut as well as increased and you've got a real problem, no?
Can you spell "sustained selling for the next few years"
Demographics is like the shit they stick into the bull's back of the head/neck in Spain after it's down.
Just when you thought Obumer had it all figured ou.
I don't understand why people would turn down $150,000 in debt forgiveness. No matter the circumstances, it can only make things better. Maybe there's something in the fine print I don't get.
So why would someone not respond to a $150,000 reduction on their mortgage? Well if you are in Nevada and bought a $500,000 home that will now carry a $350,000 mortgage but is worth $150,000 is this even worth your time.
I don't understand why people would turn down $150,000 in debt forgiveness.
If this paper scheme would have played out the banks could have remarked to market ( new mortgage) with new smaller loss (current property valuation vs original booked value) 150K X 11 million = pretty good chunk of change.
BANKS still fishing for fools
Sure was.
You have to agree the banks 'paperwork' is valid to get this largesse.
Sooner rather than later even the sheep will wake up.
Paperwork? We don't need no stinkin' paperwork.
Housing can be a great investment if your a govt crony or insider.
I put this on here yesterday; but I'm doing it again.
Notorious "Foreclosure Mill" Harmon Law (the David J Stern of the North) owns Commonwealth Auctions. Take a look at the auction "bids" submitted by Fannie Mae and HUD on June 8, 2012. Shortly after this was printed, the Commonwealth Auction website was taken offline..for approximately one week. It's fine now. The fraud is all patched up.
Harmon Law Commonwealth Auctions Foreclosure Fraud Factory 6-8-2012
Fannie Mae and HUD making auction "bids" for 140 bucks. Awesome baby! Some crony bitch probably DID buy a bunch of them for that much and stuffed a huge bill up the taxpayers' asses.
Paging John O'Brien...there is a spill in aisle one.
I was on Fox Business yesterday discussing the Purgatory housing market. With Dodd-Frank on targer to be 30,000 pages of rules and regulations, this will KILL any recovery.
http://confoundedinterest.wordpress.com/2012/07/19/jobless-claims-rise-d...
I remember saying exactly this in my MBA course in 2002. The boomers will all be down grading their houses at the same time, while we will be bust due to higher taxes, government bankruptcy and student loans. I was of course met with eye rolls, laughter derision (apart from my finance professor who nodded). I wonder how many laughing now...
Mind you by that time, my gold and silver should be able to find a few houses at bargin basement prices.
College grads want flexibility to move to a better job on a moments notice. Why dig yourself in a hole with a 30 year mortgage---a massive 30 year debt obligation? Traditionally Americans moved on the avergae every 5 years...now it's more like 3 years.
Why tie a lead weight to your ankle when you know you will have trouble selling a house plus taking a whopping loss?
Rents are dropping many places due to the flood of "For Sale" houses now turned into "For Rent."
In Las Vegas, they will give you more then 6 months free rent to have a warm body in the unit to reduce their insurance costs. Do you have any idea what it costs to insure a vacant house? In many place, >5x the normal insurance---fire, vandalism, flooding from frozen/broken pipes, etc. --- are super expensive for landlords to insure against... if yu can even get insurance.
.....seen rental prices, recently?
one sided boxing match?
http://expose2.wordpress.com/2011/11/20/a-voice-from-the-dark/
Comparative stat: Wow 11.4 million of homeowners in negative equity getting close to reaching 50% of 26 Million who own homes free and clear
This is a green shootie for housing right ;)
I'm surprised that the author doesn't make a better job of projecting this forward. If his basic thesis is correct, and I think it is, it means that house prices are going to remain depressed for the NEXT two decades. The only way the boomers will be able to downsize is to sell at way lower prices. Alternatively, when they die, the children will inherir the property and will also want to sell to get access to cash to share. But that also means selling at lower prices because there are fewer folks able to afford to live like that any longer. Either way, greater supply and lower demand means decades of lower or, at best, stagnant prices.
CNBC/MSM will find someway to spin it +. they can spin shit into silk
Liesman- "Let's look at the economics of this" Fucktard
Housing is screwed forever. With our demographic situation (boomers need to sell, youngers will not be buying); and the huge inventory being held back; and the millions of foreclosures still to come; difficulty getting home loans; taxes going up (most definitely property taxes); and all the other factors causing deflationary downward pressure on asset values... housing is toast. Appreciation will become a archaic term for housing. Just like the Great Depression, after housing hit bottom, prices just flatlined for almost 20 years and didn't start to climb until the 50s. I'm 60 now. Don't think I'll ever see home appreciation in my lifetime again. The idea of a primary residence being an investment is warped and ridiculous, and... gone.