This week, the New York Times launched The Upshot, combining aspects of the Washington Post’s Wonkblog with Nate Silver’s 538. Edited by Pulitzer Prize winner and former economics columnist David Leonhardt, we linked to the inaugural piece “America’s Middle Class Is No Longer the World’s Richest.”

This morning, I want to direct your attention to another nice Upshot column, this time, by Neil Irwin: `Why the Housing Market Is Still Stalling the Economy.” I like the column, which tries to explain why the housing market is still soft. It does a nice job of combining history, demographics, current sales data and charts.

Irwin focuses on two areas: Residential overbuilding during the boom and a lack of new household formation since the bust. You probably recall the massive new home construction during the boom; economist David Rosenberg has pointed out that we are still at levels of new home construction and sales that are associated with the bottoms of prior recessions.


Continues here


Source: Calculated Risk.
Source: Calculated Risk



Category: Credit, Real Estate

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25 Responses to “The Mystery of the Missing Home Buyers”

  1. Petey Wheatstraw says:

    The home building and RE industries are not producing a product for the largest market segment they have.

    Either the price of housing for ownership comes down to 3X gross earnings, or wages and compensation increase to one-third/year (gross) of the cost of a home.

    Of course, this can all be obfuscated and muddled by the liberal (not politically “Liberal”) application of economic theory and it’s equation-spoiling dependence on infinite money supply distributed (sometimes interest-free) as political/social entitlement. The basic ’1+1=2′ equation can be stretched into volumes of mathematics (and, in the process, be rendered indecipherable), but it really doesn’t help anyone to do so.

    There is no possible solution to any equation that contains infinity as a variable. Once divorced from the tangible and measurable, our “money” ceased being mathematical, and instead, became political. You cannot distribute goods — including housing — without distributing enough money to pay for them.

    When will our “problem” of providing housing to the average citizen be “solved”?

    As soon as housing becomes available at 3x average gross earnings.

    It is not ‘a’ solution — it is the only solution.

    • LeftCoastIndependent says:

      Don’t hold your breath Petey. The price of materials for home construction are going up at a rapid pace. Higher than ever before. The only solution for a builder is to raise his selling price, and still the profit margin goes down. Personally, I think the problem is low wages that are not keeping up with inflation. For example, in the early 70′s, I had a summer job framing houses at $12/hr. Today, I can hire a framer for $14/hr. The story is pretty much the same in every job category out there except a few “professional” occupations that are untouchable. With sarcasm, I say I hope the architects of the middle class destruction are happy with themselves. With outsourcing, offshoring, and union busting, the plutocrats and their bought and paid for politicians have brought the middle class to their knees, and this is the end result.

      • DeDude says:

        The sad part is that I am sure they are happy with themselves. In part because their plan was not to destroy the middle class, it was simply to grab as much wealth for themselves as they could. The destruction of the middle class was accidental collateral damage that they now are in full denial about (no we didn’t do that it was …[someone else]…….). The even deeper tragedy is that these rich morons have shot themselves in the foot with their brainless and unrestrained greed. The rent-seeking they live from depend on a strong economy driven by a healthy middle class – without that north America is no different from south America (with less than half the GDP/person). Eventually they and their offspring will find themselves in a stagnating or even falling economy from which they cannot squeeze anymore out for themselves. But since they will still have in excess of 500 times more than the average family they may not even notice it (being stinking rich is always a relative thing). At least not until the sheeple turn off Fox news and wake up.

    • DeDude says:

      Good points.

      We also have to remember that the kind of people who used to purchase these brand new houses included a large segment of fairly newly graduated college kids who had gotten themselves a well paid job a few years earlier and now felt pressured to “get in or forever be priced out”. A lot of things are keeping that segment away from purchasing a new (expensive) house. The idea that waiting a few more years will price you out is dead. The newly graduated college students can barely find any job (let alone a well paid one). The are also coming out with a substantially larger burden from student loans than in the past, and can neither afford nor qualify for mortgage loans.

      • Iamthe50percent says:

        We elders also. At new developments I always ask about ranch houses. The sales people don’t know why the builder is not building them. “We get lots of inquiries.” is a typical response. The builders are still building huge two story houses. For whom? I think my wife and I are typical 60-somethings. There are the just the two of us. We don’t throw big parties (small ones). Why in the world would I want the huge 3,000 square foot two-story? A 2000 or even slightly smaller ranch (NO STAIRS!) with modern amenities would do us fine.

  2. doug says:

    Good article. One question. How about the student loan burden? is that a significant part of the drag in new household formation? Has it increased in the last few years? OK three questions…

    • Ralph says:

      Counter question: How has the student loan burden shifted over the past 10 and 20 years?

      Note that the housing boom & bust is relatively recent

      • DeDude says:

        Total student loan debt (all sources) has gone from $115 billion in Q1 of 2000 to $541 billion in Q1 of 2011. The problem is that as the federal government cut spending by shifting costs to the states, the states responded by leaving more and more of higher education cost to be covered by the students. The old system where taxes on the rich paid for a good part of the education of the poor has broken down.

      • kaleberg says:

        Remember that so when you next run into someone arguing that living standards have been rising because we all have iPhones you can ask them if they’d rather have an iPhone or graduate from college debt free. (You can also ask if they’d rather have an HDTV or a defined benefit pension.)

  3. rj chicago says:

    Comment is dead on.
    Personally I see no way out of this down draft on new household formation in the near term. Long term is suspect at best but then I am no swami with a crystal ball.

  4. Derick Branson says:

    I completely agree with the analysis of Neil Erwin. In fact, lack of income opportunity for young people is one of the greatest reasons why buyers of residential property market are missing. Here, I want to add another point which is another reason why young people are not able to take the risk. If you check data of last 10 years you’ll see that medical expenses as well as education loan rate has jumped excessively. This massive debts are also pushing the average young adults to opt out of having new residence.

  5. 4whatitsworth says:

    Interesting article and good points on new household formation and equity. I see the housing market as more of a symptom of larger problems.

    1) Corporate America is hording cash and cutting costs that means less jobs and less pay for now. Also large companies are the ones who generally hire kids out of college.

    2) The United States is much less attractive to immigrants than it used to be. Government and environmental regulation has stifled the physical economy (no blue collar jobs either) and the intellectual world has the internet so why work in the US? Our infrastructure, schools, and opportunity is not that special anymore.

    3) The wealthy already have several houses so who needs another one.

    4) The United States is no longer open to tough love so the disruptive forces should that should be at play are not. Here is what should be happening A) More people should be starting their own business B)There should be a large number of people willing to work cheap and acquire skills, and C) we should be reforming the core regulatory and tax systems that hinder growth without much benefit.

    Oh well it looks like there is a political shift in the air. The only problem is that the Republicans are just as bad as the Democrats both parties say one thing and do another so I don’t think it is really going to matter. I expect more of the same in the future :-(.

    • DeDude says:

      For what its worth you are self-contradictory in your “solution”:

      4A. Before you can start a business you have to have costumers. With no costumers you will just lose a lot of money and close down within a short period of time. Even if you are successful at taking away costumers from someone else then that business will close down and lose as many jobs as the new ones you created. Without an expansion of the consumer base, job creation is a zero sum game.

      4B. People who work for cheap have no money to be costumers for businesses. So the more you get of 4B the less you can support 4A.

      May I instead suggest that we confiscate that corporate hoard of cash (1) and get all that “lazy” money to work by giving it to people who will spend it as costumers in new businesses (4A).

    • rj chicago says:

      Yep – esp. agree with the last point – does not matter anymore what color your stripe or the banner you stand under – the R and D’s have sold us all out!! Seems that according to a recent poll – 53% of the public say neither the R or the D’s represent the US anymore – THAT friends is very telling!!

      • DeDude says:

        Perhaps the most telling thing from that is how well the plutocrats media machine have managed to manipulate the sheeple. If you can get the sheeple to think that there is no difference between the two parties, then they have no reason to choose one party over the other – or even to vote. It would be dangerous for the plutocrats if the sheeple understood that one party is consistently worse than the other and that there is one minor fraction of one party that is mostly right (and dangerous to the plutocrats).

  6. ch says:

    The middle class was a function of cheap oil after World War II and the cheap oil is gone forever. The world is reverting back to the its ex-ante condition from the 100,000 years prior to 1945 before the widespread commercialization of cheap oil which featured the 1% and the 99%. Housing demand isn’t coming back b/c the middle class isn’t coming back. Ever. Unless we can find a bunch more cheap oil. Adjust accordingly.

    • rd says:

      I think the middle class was created more by the industrial and agricultural revolutions starting in the mid-100s. That broke the cycle of needing lots of people to produce barely adequate food and goods. Oil was just a very efficient and portable form of coal.

      I think the explosive growth of the North American middle-class in the 1950s and 60s was the complete lack of competition in the world following WW II and the Iron Curtain. Most developed countries dedicated all of their economic assets to destroying their neighbors’ and their own economies in the 1930s and 40s. They were quite successful at this, so the primary countries left with intact economies in 1950 were the US and Canada which allowed for unparalleled economic expansion over the following couple of decades..

    • 873450 says:

      Around 35-40 years ago OPEC contrived shortages ended cheap oil. Since then, middle class populations in Canada and many western European nations expanded, thrived, caught up to and surpassed what’s left of a hollowed out, insecure, shrinking middle class in the USA.

      How did that happen?

      It’s not the price of oil that is killing the U.S. middle class. Europeans pay from 4-5 times up to 7-8 times the amount Americans pay for oil and gas products.

      It’s captured government purposefully and comfortably disregarding 99%.

  7. rd says:

    Anecdotal evidence from our family.

    We have four children between the ages of 21 and 30. Three are now fully employed with benefits etc. The fourth is just in the process of entering the work force. Not one of them owns a home and none have any intention of owning in the near-future. The two older ones have significant savings already in Roth IRAs and 401ks. However, they live in the urban cores of major cities that have high housing costs and the cost of renting is lower than buying. Also, they are not sure if they will stay in that city long-term, so ther is another disincentive to buying.

    The younger two are still living at home which keeps their costs down and is allowing them to build savings.

    I expect that all four of them will do well down the road, inculding potentially having enough savings that they could consider retiring in their 50s. It would not surprise me at all if they get there without ever owning a home..

  8. louis says:

    After getting your ass kicked, you tend to avoid the ass kicker for a while.

  9. Futuredome says:

    sorry, there are no “missing home buyers”. They are in their 50′s and 60′s, producing a national contracting boom in home remodeling. Housing isn’t the driver anymore, tech is via gen x(and their children). They would rather live in the city or rent than buy a house. They max credit for fancy gadgets, rather than build a house.

    Real Estate isn’t holding anything back. When are these people going to get it. Let the Boomers go.

  10. rj chicago says:

    AIA Architecture Billings Index – ummmm……down again for March.

    The AIA typically says that this index is a 9 to 12 month lead on future construction – but I am beginning to wonder if this is actually now a RESULT of demand rather than a look forward to construction demand.
    Midwest where I work – dismal at best as there is a current debate by Obama wanna be Rahm on DOUBLING – yes – you got it – DOUBLING property taxes in the city. Talk about a way NOT to attract buyers.

    As my wife was always want to tell me – you wanna attract bees – you gotta make honey!!!
    Link to AIA billing here:

  11. Robert M says:

    What is missing from the analysis is income. W/ American workers having received no increase in median inflation adjusted income(see chart) for the last 20 yrs there is no way to save. Even the boom from 2002 to 20008 was purely the result of the the Greenspan put keeping interest rates deliberately (see chart).

  12. I was looking at some of the consumer spending stats and to my utter surprise I found out that consumer spending is actually increasing and at the same time saving rate is slowly but surely coming down. This means that the perception of the consumers are changing steadily on the economy and the propensity to save a large chunk of their income for securing near future is in fact decreasing. This is in fact a very good sign and there could be a multiplier effect in the form of heightened entrepreneurial activities (due to their changing perception of the economy and positive expectation of the economy) leading to creation of more jobs in the coming days. In fact, more consumer pending means the market is also expanding. Therefore, multiplier effect of more investment, more creation of jobs, and expansion of market, ultimately leading to better economic expectation and ultimately more investment is in the offing (say a year or so, slowly but steadily). There already has been a rebound in the market.
    In a recent commerce department stat it has been found out that household purchases have increased by 0.3% after a rise in the same by 0.2% during January 2014. Similarly, advancement of incomes has also been 0.3%.
    The rise in disposable income has been significant in the last few months and is going to be better in the coming few months of spring. I’m quoting from a Bloomberg article “Disposable income, or the money left over after taxes, rose 0.3 percent after adjusting for inflation, the most since September. It climbed 2.1 percent from February 2013. Wages and salaries increased 0.2 percent after a 0.3 percent gain.”
    The raison d’être of spending so much time on the facts of rising disposable income is to project the fact that there has been a positive expectation that can be made from these figures. Our economy is just coming out of the deep recession and the economic sentiments look good. In fact, the mortgage rate, especially the 30 year ones, are also on the rise. It is currently hovering around 4.25% but is expected to be anything between 5 to 5.5% by year end. Comparing this with that of the rate one year back (which was anything between 3% and 3.25%) the change has already been significant. So, it can be inferred that the economic situation is actually changing for the better. The consumer expenditure has started to be better now and it is expected to be better in the coming months and definitely year, until and unless another bubble jeopardizes all the gains made during this time.
    Therefore, what I’m trying to say is: The home buyers may be missing right now. But the situation will change for the better in the coming one year or in the coming few years, with the improvement in economic situation. American middle class income has surely decreased but it is surely rebounding back.

  13. louis says:

    Your stats could be fudged? Income has nothing to do with access to large amounts of debt. It is purely a guesstimate of ability to pay. And your ability to pay means little to a bank that has friends in all the right places.