Relentless optimism?

As Europe waits to see what follows the Cypress haircut and Italian political deadlock; Japan waits to see if its efforts at halting deflation produce progress, ignite excess inflation, or fail; China waits to see if it can sustain growth while coping with raging inequality and corruption; and the rest of the world waits for growth, it is nice to see such optimism about markets and America. Tight oil and fracked gas, a return of manufacturing, the housing market nearly back to normal — all good, right?

Perhaps I remain the only skeptic left on the housing market. To me, much of the recovery was spurred by investors snapping up single-family houses at depressed rates in order to rent them out. That is fine, but it makes housing a speculative asset market, rather than a market driven by a steady expansion of basic demand from new household formation.

Speculative asset markets peter out or crash. Steady demand-driven markets underwrite long-term real growth. So there is a real question whether the housing market revival portens the former or the latter.

Here is what the demography and economics suggest. The size of the first-time home-buyer cohort (25-40) will grow by just under 1% per year for the next ten years; that is not bad. But two other factors come into play. First, people buy new homes when they are expecting their first or additional children. The fertility rate in the US has fallen to an all-time low, and the number of births is declining. Even more important, the ability of young people to buy homes is being hit both by heavy burdens of student debt (so that student loan payments compete with mortgage payments for available income) and stagnant wages. In fact the percent of people 20 and older living with their parents has doubled in the last 20 yrs, from 1 in 10 to 1 in 5.

So expect the new home market will level off soon — barring a big upswing in incomes or birth rates, neither of which I see as likely.

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About jackgoldstone

Hazel Professor of Public Policy at George Mason University
This entry was posted in The Global Economy, U.S. Politics. Bookmark the permalink.

4 Responses to Relentless optimism?

  1. Hey there, You’ve done a fantastic job. I will definitely digg it and personally recommend to my friends. I am sure they will be benefited from this web site.

  2. Hoyte King says:

    I just discovered your blog via http://www.cnas.org/blogs/abumuqawama/2013/03/malthus-muburak.html. What you write is reflective of someone who is well grounded in what it takes to run an economy for the last 250 or so years. I will spend time reading what you have to say in the future.

    It seems to me, though, that the paradigm under which we live has changed due to resource constraints. Have you considered this in a serious way? I believe the answer is no, based upon your advocacy of more growth (ex. “Oops, What Happened to Growth?”).

    Take a look at the following:
    http://www.cnas.org/blogs/abumuqawama/2013/03/malthus-muburak.html (resource constraints do not allow economies to grow as before)
    http://thearchdruidreport.blogspot.com/2011/01/onset-of-catabolic-collapse.html (what will happen due to resource constraints)
    http://www.esf.edu/EFB/hall/ (economics is based on resources)

    I am sure there are many people out there who would be interested in a considered opinion by yourself on resource constraints and what effect they will have on our global society, as well as what is and is not being done by policy makers on this question.

    For example – what are we going to do when the Bakken runs dry? http://www.postcarbon.org/drill-baby-drill/

    • Glad to welcome you. But you pose too many big questions to answer here; I will have to address them in future blogs!
      For now, let me say I don’t worry about the Bakken running dry (Siberia has even larger formations). I worry about whether we can avoid major global climate change before the oil runs out.

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