Guest Post: What If Housing Is Done for a Generation?

Tyler Durden's picture

Submitted by Charles Hugh Smith from Of Two Minds

What If Housing Is Done for a Generation?

What if housing valuations are in a structural, multi-decade decline?

A strong case can be made that the fundamental supports of the housing market-- demographics, employment, creditworthiness and income--will not recover for a generation. It can even be argued that housing has lost its status as the foundation of middle class wealth, not for a generation, but for the long term.

Let's begin by noting that despite the many tax breaks lavished on housing--the mortgage interest deduction, etc.--there is nothing magical about housing as an asset. That is, its price responds in an open, transparent market to supply and demand and the cost of money and risk.

There are a number of quantifiable inputs that feed into supply and demand--new housing starts, mortgage rates and income, to name three--but there are other less quantifiable inputs as well, notably the belief (or faith) that housing will return to being a "good investment," i.e. rising in price roughly 1% above the rate of inflation.

If this faith erodes, then the other factors of demand face an insurmountable headwind, for the most fundamental support of housing is the belief that buying a house is the first step to securing middle class wealth.

Rising rates of homeownership require five conditions:

1. Favorable demographics: a cohort of potential buyers that is larger than the cohort of potential sellers.

2. Rising household formation rates: an expanding population does not necessarily translate into rising rates of household formation. If the number of people per household goes up, then the number of households can plummet even as population expands.

3. A large cohort of creditworthy potential buyers: that means buyers with savings, buyers with sufficient income to pay the mortgage and buyers with low debt loads.

4. An economy that generates rising incomes to support homeownership.

5. An unshakable belief that owning a house is a favorable and secure investment that will rise in value in the decades ahead.

If the first four conditions have eroded, then the belief in the permanence of a rising housing market will also erode.

The demographics are not favorable to housing on a number of fronts. Jim Quinn recently posted some devastating charts of U.S. demographics in his brilliant post CAUSE, EFFECT & THE FALLACY OF A RETURN TO NORMALCY (The Burning Platform).

Without going into too much detail, we can stipulate that the Baby Boom (65 million people) will be downsizing their housing, i.e. selling for the next two decades. We can also stipulate that most of the Baby Boom no longer has the wherewithal to buy second homes; rather, they will be dumping second homes to pay for living expenses as earnings, interest income and housing equity have all cratered since 2007.

Not only are there not enough younger workers to buy all these millions of homes that will be put on the market, few of those younger workers have either the creditworthiness or income to buy a house unless the Federal government gives them essentially free money and a no-down payment entry. With the Federal deficit skyrocketing, that sort of giveaway won't last long.

Labor's share of the national income has plummeted to historic lows. How can households be expected to buy a house when their real (inflation-adjusted) income declines year after year?

Labor share is the portion of output that employers spend on labor costs (wages, salaries, and benefits) valued in each year’s prices. Nonlabor share—the remaining portion of output-- includes returns to capital, such as profits, net interest, depreciation, and indirect taxes.

This chart suggests that a fundamental structural shift has taken place since the dot-com bubble popped in 2000: labor's share of the national income is in a secular long-term decline. That does not bode well for household income going forward.

Meanwhile, income has declined, especially for younger workers. Soaring Poverty Casts Spotlight on ‘Lost Decade’:

According to the Census figures, the median annual income for a male full-time, year-round worker in 2010 — $47,715 — was virtually unchanged, in 2010 dollars, from its level in 1973, when it was $49,065.


Overall, median household income adjusted for inflation declined by 2.3 percent in 2010 from the previous year, to $49,445. That was 7 percent less than the peak of $53,252 in 1999.

Notice that the only age brackets with flat or rising incomes are the over 55 cohort; everyone younger than 55 has seen their income slashed. And this is assuming "official" inflation is accurate; if it understates real inflation (loss of purchasing power), then the income declines are actually much more severe than charted here.

Part-time jobs and temp jobs do not generate enough stable income to support a mortgage. The only measure of employment that really matters in housing is fulltime employment, and that has declined to levels of 1999-2000 even as the workforce has added tens of millions of potential workers (all of whom have been deleted from the official workforce by Federal bean counters as "not in labor force" or "discouraged workers").

I don't have time to assemble the statistics for this entry, but the number of people with fulltime jobs that pay enough to support a mortgage is smaller than the number of fulltime workers. In other words, people working fulltime at or near minimum wage have a difficult time qualifying for a non-subsidized mortgage.

Household formation is also in a long-term decline. The chart depicts the housing bubble spike when marginally qualified people bought homes. Once the bubble popped, household formation plummeted and then returned to the declining trendline.

Recall that there are about 130 million housing units in the United States. About 112 million housing units are occupied: 75 million by owners and 37 million by renters. There are are about 19 million vacant dwellings: about 8.5 million second homes and vacation rentals, 2.5 million home for sale and another 8 million "vacant for other reasons" in Census-speak. (All number are approximate, drawn from 2010 Census Bureau data.)

If we subtract the 4 million second homes, that leaves about 15 million homes that could be occupied by owners or renters. With an average household size of about 2.5 people, that means we already have enough dwellings to house an additional 15 million households or 37 million people.

But this calculation overlooks the financial realities of declining income: the number of people per household is likely rising as fewer people can afford their own homes or apartments.

This oversupply of dwellings and soft demand is reflected in this chart of housing activity: despite unprecedented Federal subsidies and Federal Reserve pump-priming (buying impaired mortgages, lowering interest rates, etc.), housing has flatlined.

What few are willing to entertain is the possibility that housing is no longer the foundation of middle class wealth, and that its decline is structural, not cyclical. If we think of housing as an asset class that reflects not just demographics and income but financialization (i.e. hollowing out), then perhaps it is simply following the S-curve of financialization:

Lastly, we must consider the impact of declining employment, stagnating income and skyrocketing rates of student-loan debt on the creditworthiness of young potential buyers. If someone exits college with $100,000 in student-loan debt, how much will they have to earn to qualify for a $100,000 mortgage? How many graduates will earn that sum on a secure basis? Perhaps not as many as is generally assumed.

If the risk of default is once again priced into mortgages--that is, if the mortgage market ever ceases to be socialized and 99% guaranteed by Federal agencies--then we can also anticipate higher standards for qualification and a shrinking pool of qualified buyers.

It's easy to qualify people for a mortgage. The hard part is making sure they will have enough income and faith to service the mortgage for the next 30 years. If demand is softer than supply, prices will decline. If the belief that housing is the "best, most secure investment" fades, then so too will demand.

Declining employment, income and household formation are complex, long-term trends. If they continue trending down, so too will housing.

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Colombian Gringo's picture

Housing is done for this generation.

LawsofPhysics's picture

Look at what ZIRP has done for Japan...  housing is done for several  generations.

Diet Coke and Floozies's picture

Look at Fukushima... Japan done for millenia...

The Big Ching-aso's picture



Habitat For Inhumanity is looking for expert cardboard construction volunteers.

Joeman34's picture

It would seem the housing market is dead, but anecdotally, facts do not support.  The market where I live can only be described as hot.  My sister-in-law just sold her house in 6 days for 96% of the asking price.  Also, through my wife's business, we're in touch with a large network of contractors and sub-contractors and most are currently maxed-out with new construction and remodeling work.  I know the ZH community love the doom and gloom, but what I'm experiencing does not support the belief housing is dead.  Contrarian viewpoint would suggest housing may recover faster than most expect at this point.  We shall see...

insanelysane's picture

and your other sister-in-law makes millions sitting at home.  You didn't note what the asking price was so your statement that it sold in 6 days for 96% of the asking price is meaningless.  In the Northeast we are losing US Reps because people are fleeing South and not just those retiring.  The housing market will not recover here for years.

Joeman34's picture

No need for the dickhead response.  Asking $375m, sold for $360m.  Sorry if some of the facts on the ground don't support your doom and gloom milieu.

riphowardkatz's picture

that is all you will get when presenting the other side of the argument to housing here.

The doom and gloom can tell you everything people will not put their money into but have no clue what people will put their money into. 

Also facts on the ground where I am support what you are saying. Houses up 15% yoy with less than 2 months of inventory.


Janice's picture

Location, Location, Location. The house next door has been on the market for over a year. First listed at $225k, now down to $175K. Still vacant.

rotagen's picture

Using this logic I must assume that since it was colder than average in the state of washington, then the entire US was colder than average.  Good job!  Those stupid statisticians using meaningless terms like "average" and "median"....morons.

jerry_theking_lawler's picture

yes. i bet 'dingus' has property in Washington there is lots of free money floating around there....


Fox-Scully's picture

If this sale or housing market occurred in the greater DC area, then it is meaningless.

Joeman34's picture

It did not - Chicago area. 

But, you're right, the reality is, it's a waste of time to talk about real estate on a national scale.  National figures are meaningless in my opinion.  As the old saying goes, "real estate is always and forever a local matter."

Spastica Rex's picture

Why is it a waste of time? Can't see the forest for the trees?

Joeman34's picture

If you spend all your time staring at the forest, you may miss the fact one 'tree' is a better value than another. 

Spastica Rex's picture

OK, I think I understand. See my post a few spots below.

crawldaddy's picture

point is, I can sell my house tomorrow as well if I price it low,  so our point, is you have no point.

jayman21's picture

You are assuming there is a bid/ask with a functioning market.  What if there is no bid?  Does not matter what your price is.  No bid no sale.  MTM = 0.  There are a lot of historical references to this and is something most people do not price correctly.  The one historical reference that sticks in my mind is from the Great Depression...many high quality farms could not be sold as they were in a bid less market.  No one showed up at the auction.

Binko's picture

I have a hard time understanding the intense need of people to reduce everything to a personal level. Here's a great article about demographic and financial trends, and we get a string of idiots replying "Derp derp, my sister sold her house for big bucks" or "Big sales in my neighborhood". It's simply sad how desperately people strive to cling to their illusions.

Spastica Rex's picture

I think some are looking at this article from the perspective of real estate speculating - or investing, if they prefer. It's a short term personal gain perspective which is valid, as far as it goes. I certainly agree with you; I don't think that's what the article was about and to dismiss it out of hand because the perspective is different is lazy -- and potentially self defeating. 

riphowardkatz's picture

You can site all the demographic trends in the world. They are irrelevant in the face of facts. In addition everyone of these trends would apply to ANY and ALL markets. So the article leads one to ask , AND WHAT? 

boomers are liquidating (not just real estate, gold and stocks and everything)
young people have no money (OK they wont be buying gold then, or real estate or ipads or anything)
Interest rates have to rise (sounds good, then foriegn entities will be buying more and gold will lose some appeal, equities would go down as well)
But Governments cant have interest rates rise (ok then gold may not lose its luster)

Trends like the ones in the article really offer no guidance to what is happening. We are all speculators now and not long term speculators but rather traders. The antedoctal evidence offered by some here is valid in that trades are occuring and profits are being made.

Talk about generational stuff is nonsense. There are no investments there are only speculations. 

TBT or not TBT's picture

The generational stuff comes out pretty silly from marketeers, but the actuaries looking at the demographic profile of the population in detail understand very quickly there will be long slow period thanks to aging and retiring of boomers...short of some technological advances not currently evident(though possible) OR, oh some cultural shift where boomers will sign their assets to the government and then check out Jim Jones style, or Logan's Run style.

smiler03's picture

Young people will forego everything to get an ipad. It's a generational thing.

lenitivelea's picture

You're talking about the market in a large city, and you're right; it's probably improving. The largest metropolitan areas will continue to improve as people flee to the hubs in search of employment, or to rent after being foreclosed upon. It's suburbia/country/small towns that are absolutely tanking and will continue to tank. 

The population will consolidate into the large cities, and most will rent. Smaller areas could very well turn into ghost towns, as many already have. 

Should be fun to watch. 

NotApplicable's picture

Personally, I'd just say that the debt bubble has yet to pop there, and any viewable recovery is really just the same ole debt-fueled disease.

In my area for example (big college town), there are still plenty of student rentals being built, while whole new subdivisions decay. Which has busted a few local millionaires and a couple of banks along the way.

While things might look better on the surface, it is a mere facade to cover all of the deficiencies listed in this article. Ignore these facts all you want, but you cannot escape their ultimate consequences.

Milestones's picture

A guess--Ft. Collins?         Milestones

MachoMan's picture

There is probably quite a bit of truth to this...  I'd also like to know the financial stability of local banks...  in that, many places are propped up by terrible local lending...  awaiting the day the bill comes due...  this, and many other factors must be known.

I think the big issue is that despite real estate being local, macro factors do impact it...  albeit sometimes to a lesser extent than others.

Stoploss's picture

1).        Your full of shit.

2).       One drop of rosy scent in a sea of rotting flesh doesn't change the smell at all.


Joeman34's picture

1). Why am I full of shit?  I knew my post would be controversial.  So, let’s think about this…  I posted a lie on ZH so everyone on the board could attack me, tell me what an idiot I am, and verbally abuse me over the internet.  Yeah, makes a ton of sense. 


 How about this – you’re full of shit you useless moron.


Jedi Longsabre's picture

You right JM34 RE is all local. If anyone on ZH wants to prove me wrong come down to Florida to Brevard County where the space program is shutting down and pay me 40 cents on the dollar for what I paid for my house in 2005. Go ahead take advantage of me I dare you! PLEASE! ok 35% ok how about a slighly used surf board then? I'd take that deal. 

ElvisDog's picture

Joeman34, I think you're confusing highly-localized, anecdotal evidence for a macro trend. Just because your sister sold her house for 96% of the asking price does not discount what was written in the article. I don't think there is any question that boomer retirement, high student loan levels, stagnant job and income prospects for the under-35 crowd will dampen the housing market.

In my opinion, the two things keeping the housing market from dropping another 50% are ZIRP from the Fed and federally guarenteed mortgages through FHA and Fannie and Freddie. Take either of those two things away, and the patient dies. If you're investing in housing right now, you are assuming that both of those items will continue into the far future.

halleys5's picture

Anecdotal Garbage.
It's not all doom and gloom, it's the reality of the macro market

boogerbently's picture

 The housing market will not recover until all non-paying tenants are removed, and those homes are foreclosed on and  resold.

And, existing inventory needs to be sold. Why would anyone buy a used house, when they can buy a new one for the same price?

Getting these existing inventories of homes properly assigned is the only way we will get a true read on the "health" of banks.

IF the market is dead for a "generation" or so, what do you want to bet some (well intentioned) politician suggests we lower the lending standards, to allow more Americans the ability to be homeowners. LOL

Freddie's picture

The people of the NE should stay there and *****ng suffer.  Do go to the south and turn NC, SC, TN et al in to libtard hellholes likethey did to FL.

DeadBeat's picture

I know what you mean, it is similar in my area, but I don't think that is consistent with the nation at-large. Just like in Moscow where a year ago home prices were astronomical while the rest of the country was destitute. The prices in hot areas become higher while the inequality increases.

uno's picture

The only hot area I know of is the DC metro (surprise), is there any other?

Also there are a lot of homepath signs where you bid on a house, Fannie Mae REO homes for sale.  One I know of the tenents walked away last year (June) and bought a much larger home down the street for a lot less.  The house has damage (holes in walls, not painted) so this site seems to be make any offer AS IS.

gabeh73's picture

We have had 6 years of housing declines (2006-2012). Most here would agree that inflation is a definite possibility...most would also agree that the federal government needs to keep interest rates relatively low if the US is going to have any hope of making interest payments on 17-20 trillion dollars in debt we will have by 2013...I live in a nice Boston suburb and have seen that the contractors are busy here. Not crazy to think housing could be back in "outperform" mode again soon if we really are going to see dollar debasement.

ElvisDog's picture

Dollar debasement has nothing to do with it at this point. That card (ZIRP) has already been played. What's more, additional dollar debasement will hurt housing because it will cause commodity prices (gas/food primarily) to rise. The key to housing at this point is income. Income is stagnant-to-downward trending. If you think housing will "outperform" you need to explain where the income gains are going to come from.

neidermeyer's picture

Housing may "outperform" sometime in the near future but the way I see it the only driver will be inflation... When you combine no job market improvement with higher interest rates and inflation you get MAYBE one high priced sale making the "comps" look good while all the rest of the inventory stagnates , people are limited to 30% of take home and that's moving DOWN,, it's damn near impossible to make normal living expenses much less save for a down payment.


The banks need to be slammed with reality ... based on the FACT that they sold the mortgages in the creation of a security there are two undeniable facts ... 1.) The mortgages no longer exist as a function of the UCC rules meant to stop the fraudsters from selling a note to multiple entities. 2.) The banks are bankrupt if you mark even 10% of their so called colatteral to market.

I don't want to live in the same state as Japan (minus the radiation).

koperniuk666's picture

I am puzzled by the down arrows?

Is this confirmation bias? Or are you posters stupid? Can you not learn anything from these posts? 

Why are you here? will you please go back to your turgid normality?

Thx JM - particularly if your post is accurate. I agree with Krastings detailed and informed assessment but we all need to pay attention to what the sheeple are (still) doing. Witness the down arrows to see just how many people are capable of saying ' housing will recover - nothing safer than bricks and mortar...)

Bless them! I love the stupid people! If they were any smarter there would be more competition for me ( and less space for me in this Swiss ski resort...... still snowing here..... and the imminent CHF peg break is about to make me another.............)


Its_the_economy_stupid's picture

Aside from Wash DC, the mid-Atlantic region is still toast.

stuckpixel's picture

Yeah, just because your sister-in-law was able to sell her home doesn't mean the market as a whole is in good shape.

My family and I are hopefully going to be in the position to buy a home to put down some roots in within the next few months. We started looking at houses just for the heck of it late last year.

Most of those same houses are still available. And they've lowered their asking price regularly. And they're still there.

I'm seeing this everywhere around where I live. Houses go up for sale (either a short-sale, bank foreclosure, what have you) - and they stay up. For a very, very long time.

People want to believe the market is coming back -- I've yet to see anything that shows that points in that direction.

ratso's picture

The impact of inflation on housing will be substantial as replacement costs climb and values start to exceed mortgages.  The time frame for this is about 3 years before the inflation genie cures the problem.

Binko's picture

True. Also there will be an accelerating decay in the condition of the housing stock. I live in a small, 50 year old early-suburban house. But I'm amazed by the incredible solidity and quality of the foundation and attic construction.

In contrast houses build in the last 20 years were simply conduits for maximizing profits. Shoddy construction and cheap imported materials were the norm. In our new low-wage society people will simply not be able to afford repairs and maintenance. I'd expect many of the mini-mansions built recently to be uninhabitable in a couple of decades.

Joeman34's picture

WTF?!?  From your post not more than a few minutes ago...  "I have a hard time understanding the intense need of people to reduce everything to a personal level...  Here's a great article about demographic and financial trends, and we get a string of idiots..."

So you post about how stupid it is to present anecdotal evidence and then proceed to post an anecdotal argument a few minutes later??  And I'm the idiot?? 


StychoKiller's picture

One should not look for fish in the treetops.

HarryM's picture

Historical House prices were moving along nicely with inflation from the 1970's until around 2000.

From 2000-2011 the cost of housing spiked throught the roof (pun intended)

Currently home prices are back inline with the inflation curve. 

here's a link to some nice charts

ElvisDog's picture

The impact of inflation on housing will be substantial as replacement costs climb and values start to exceed mortgages.  The time frame for this is about 3 years before the inflation genie cures the problem.

Wow, at the risk of being impolite you really need to pull your head out of your ass. Inflation doesn't help housing. It hurts housing, because if you're spending more money on food, energy, education costs, insurance, etc. you have less money to pay a mortgage. Were you referring to wage inflation? If you were, then tell me where the wage growth is going to come from.

Joeman34's picture

Inflation helps housing in that existing owners with fixed mortgages payback principal with inflated dollars.  See repudiation of debt and learn something.  It’s the entire objective of Mr. Bernanke’s ZIRP.

ElvisDog's picture

Time for you to learn something. Inflated dollars only help you if your wages are going up too. Got that, Einstein? Wages have been stagnant in real terms since the 1970's and have been falling in nominal terms for the past few years. In this situation, inflation causes your costs to go up while your income does not.

What's more, helping homeowners through ZIRP is the furthest thing from Bernanke's mind. The entire purpose of ZIRP was to bail out banks that otherwise would have been forced into bankruptcy after 2008.