Whenever we discuss the gloomiest forecasts for housing, we inevitably hear from readers who believe that house prices will have have to start rising again very soon because demand for having a roof over one’s head isn’t going down. There’s some truth in this: we’re not giving up lifestyles in stationary shelters any time soon. The United States won’t become a nation of nomads that shuns houses.
But don’t take this too far. While individuals may continue to desire to live in houses, overall demand for houses may decline. That’s because of something that no meddling with interest rates can repair. You see, the huge baby boom generation didn’t reproduce itself at the same rate it was produced, which means that the so-called Generation X is much smaller than the generation that preceeded it. And not only are they smaller, for a variety of reasons they probably won’t generate the same demand for single family homes their parents did.
- College Debt Burden. Generation X is afflicted with an unprecedented amount of debt thanks to the boom in higher education. Wages haven’t kept up with this mounting debt, which means that it takes even longer to work off this debt. It seems unlikely that banks with higher credit standards will be willing to lend to Gen X the way they did to the Boomers; and it’s unlikely that debt stricken Xers will want to accumulate even more debt by taking out big mortgages.
- Dearth of Births. Only 44 million people were born into Generation X. There are currently 19 million empty homes in the US. That means that if Gen X pairs up through marriages, cohabitation or roommating, they can live in the empty homes without ever buying a new one.
- Boomers Trading Down. As John Wasik of Bloomberg points out, it’s not just that Gen X is smaller. The Boomers are changing too because they are getting older. “Although we may not be headed for a 1930s-style Depression, there’s plenty of evidence to suggest that boomers are dumping their four- and five-bedroom suburban homes for two- and three- bedroom condominiums,” he writes.
- Housing Scars May Last. The Boomers had a spectacular confidence in the strength of the housing market, built in large part on their historical experience of ever rising house prices. Gen Xers have had a quite different experience, one that is likely to make them far more wary of investing in homes.
The good news is that there’s a slightly larger population group rising up behind the Gen Xers. Eventually, they may actually drive up housing demand, and prices may rise as well. But that’s a long, long way off.