Saturday, August 31, 2013

There was no housing bubble,, I'm serious.

As a follow-up to the previous post, I've been trying to reconcile this graph from an earlier post

with this graph from

So, was there a sustained period of overbuilding, or wasn't there?......There wasn't!  As outlined in the previous post, there are several parallels between the 1970's and the 2000's.  One of them is an overabundance of 45-65 year olds, who are earning the highest incomes of their lifetimes, whose savings is peaking to its high point before they transition into retirement where they will start dissaving, and who are beginning to transition their savings into low risk fixed income.

One of the outcomes of this demographic context is that the prices of single family housing units is bid up, partly because that demographic can afford it and can use it, and partly because for them it is a superior investment to other low risk investments.   The peculiar dual role of housing as consumption and investment gives it an especially superior profile as a pragmatically low risk investment.

We can see in the 2nd graph that in the 1970's, starts for single family homes hit all-time highs.  This is especially striking, considering the very high nominal rates of the time.  As I speculated in the previous post, the high inflation at the time probably served to mitigate the trend of single family homebuilding that likely would have surged otherwise.  The 2000's saw low inflation and low nominal rates, so that when the baby boomers hit that age range, there were fewer constraints on homebuying.  The number of houses built skyrocketed to new highs, along with prices.  But, as can be seen in the 2nd graph, this came at the expense of multi-unit building.

So, while the investment preferences of baby boomers did lead to a boom in housing, the total housing stock remained level.  We didn't overbuild housing; we just accommodated the baby boomer preference for single family homes......both graphs are true!

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