From a small northwestern observatory…

Finance and economics generally focused on real estate

Posts Tagged ‘demographics

Real estate and the “long game”

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The two big economic stories right now — and probably for the rest of the year — will be the impact of the Euro problems and the impact of the impending “fiscal cliff” in the U.S.  We don’t want to minimize the significance of either of these impending problems on the financial world in general and real estate in specific.  Indeed, either of these problems has the potential to bring down the global house of cards.

Nonetheless, it’s important to keep our eyes on the longer trends within which these crises exist.  The exit strategy for either of these crises depends heavily — maybe even totally — on the trajectory of these longer-term trends.

A very brief article in the current issue of The Economist caught our eye this week.  The article was about the disparity between the median population age of various countries and the average age of that country’s cabinet ministers.  The goal was to show that in the “rich” world (e.g. — Germany), the cabinets more closely resembled the general population, while in the “emerging” world (e.g. — India, China) there was a large disparity, with attendant potential instability.  In that context, however, the article wasn’t very compelling — the U.S. has a huge disparity, while Russia has a high degree of alignment.  Go figure. What caught our eye, though, was the variation in population age among various countries, and the implications for long-term growth.  Quite a few years ago, I was at an academic conference which discussed the increasing age of the population in Europe, and in that context how Europe had the potential to be the next Japan.  An aging population has very significant implications for real estate — particularly in the commercial sector.  As a decreasing portion of the population is working to support a larger and larger retired segment, there is both a generic malaise inherent in the economy (unless high increases in productivity are induced) and a decreasing need for commercial real estate space (particularly in offices, warehouses, and manufacturing).

In that context, the emerging nations of the world have an edge — note the low median ages in India, China, Brazil, and Canada.  Ironically, the U.S. is also in that mix, and to a lesser extent Australia and Russia.  At the other end of the spectrum, Japan and Germany have nearly the same median age problems.  The latter is most problematic, since the German economy has been entrusted with bringing the Euro zone out of its doldrums.  Clearly, a rapidly aging German population has less need for commercial real estate, but also less ability to drag the ox cart of Europe along the road to recovery.  Britain, solidly part of Europe but outside the Euro, has a somewhat younger population — indeed slightly closer to the U.S. than Germany and about equal to economically stalwart Canada.  The short-term horizon will continue to fuel real estate challenges and opportunities, but the “long game” context needs to be taken into account as opportunity-seekers consider down-the-road exit strategies for today’s purchases.

Written by johnkilpatrick

July 31, 2012 at 6:45 am

Housing equilibrium — part 2

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My meanderings on housing equilibrium are about to become even more muddled, in a way, and clearer in others.

To wit… in the middle of the just-past decade, before the market started melting down, it was already apparent to researchers that the housing market looked decidedly different than it had before. It was clear that prior to about 1994, the homeownership rate had hovered around 64% for many years. Why, then, did it apparently take-off to higher ground and make a nearly non-stop upward run from then until about 2004?

The “run up” was the topic of a great paper by Matthew Chamber, Carlos Garriga, and Don Schlagenhauf of the Atlanta Federal Reserve Bank, produced as part of their working paper series in September, 2007. For a copy of it, go here.

Their focus was on the “run-up”. Our focus today is on the “run-down”. In short, if they can explain why ownership rates ballooned up in the past decade, then perhaps we’ll have some idea of how far down they will drop in the coming decade.

They find that as much as 70% of the change in homeownership rates can be explained by new mortgage products which came on the market during that period. “Easy money”, which is how this has been described in the press, made homeownership possible for millions of new owners. The remainder of the changes, in their study, are explained by demographic shifts.

There is some intuitive logic in all of this (as there usually is, ex-post, in good empirics). The American population got a bit older during the period in question, as the baby-boomers came into their own and also into an age bracket when homeownership makes a lot of estate and tax planning sense. Since these demographic shifts are still with us, and indeed continue to move in ownership-positive directions, it would suggest that a new equilibrium will probably fall out somewhere higher than the old one.

As of the most recent American Housing Survey, the current homeownership rate in America is 66.7% (down from 69.8% at the peak a few years ago). During the 80’s and 90’s (the boom which followed the 80’s recession), the rates held nearly constant at 64%. The FRB-Atlanta study thus suggests a new equilibrium somewhere between 64% and 66.7% (where we are today). In fact, if you concur that 70% of the boom came from mortgage products (which are no longer available) and the remainder from factors which ARE still at play, then one might surmise that the new equilibrium is close at hand.

Written by johnkilpatrick

January 17, 2011 at 6:41 pm

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