There’s a big underlying story behind all the news stories we see related to inflation, housing, and jobs: US Population Growth and Birth Rates.
I’ll start by saying I was wrong on housing, very wrong. In mid-2019, I sold my last house in a soft market and saw some continued softening through 2019. Then a pandemic hit, unemployment spiked, and I expected pricing to get even more attractive. By the end of the summer of 2020, I wondered what’s going on with the housing market?
Guy on FIRE originally pointed me to demographic data as we had our normal bullish and bearish arguments on real estate. What exactly was the data he pointed me to?
US Birth Rates: The Birth Rate of a country measures how many people are born per 1,000 people. In 2019, the CDC reported 11.4 people were born for every 1,000 citizens in the United States. For perspective, the birth rate in the height of the baby boom years after the Second World War was 24.2 births per thousand.
The birth rate experienced decline until 1978, where it briefly bottomed at 14.76 births per 1,000 before a smaller rise / plateauing for the next 18 years from 1978 until 1996. This plateau is sometimes called the “echo boom”, as it represented the child bearing years of the baby boomers. The result of this? There is a significant portion of the population born between 1978 and 1996.
Birth rates have declined over the last twenty five years to their current level of 11.4. To put that into perspective, that’s a 1/3rd drop in the number of people being born per capita today compared to 25 years ago. What is the consequence? During the 2010-2020 census period, three states experienced overall negative population growth.
Brookings Institute: 2020 Census Data Release
Census: More than half of the United StatesPopulation Growth slowed further in 2020
While the data above encompasses the full decade, it doesn’t address the continued trends. This article from Pew Research estimates that 16 states experienced population decline in 2020 alone.
All of this has significant impacts on all economic news coming out every month!
So what about the aging population and deaths?
The oldest baby boomers (1946) turn 75 in 2021. There was an abnormally low birth rate for the four years prior due to the Second World War and coming out of the Great Depression. According to life expectancy tables, someone who has made it to 75 has a remaining life expectancy of more than ten years, a wonderful result of first world healthcare.
The Job Market:
Entry level service jobs are where we see this every day. Retailers and restaurants are struggling with their workforce. The issues are deeper than those that comment “just pay more”, “people don’t want to work”, and “let unemployment benefits expire”.
There are more jobs available than the addressable population to fill them. The entry level service jobs have historically been filled by teenagers, people in the first half of their 20s, and retirees. There is just less of this population available to fill these jobs between the lower number of people below 25 and people in their mid 70s aging out of the physical and mental ability to do work (outside of being a politician of course).
There will be an adjustment period, it’s going to include higher wages, replacing labor with technology, and some closed businesses that can’t support the higher costs. Labor is already seeing a larger percentage of economic activity than they have for the last 30 years and I expect that to increase. This is a great thing for the wage earner while not quite as good for those of us enjoying investment returns. I expect this to chip away at many of the inequality statistics people cite, first in regards to income and eventually regarding net worth.
The labor shortage isn’t just in the low wage service sector, it is occurring in almost every sector. There hasn’t been a better time in my lifetime to consider changing employers.
The Housing Market:
A population glut of people in their prime household formation years (between 25 and 40) certainly caused the biggest housing shortage I’ve seen in my lifetime:
The United States got ahead of itself in new home starts in the 2000s, dropping all this inventory into the market due to false demand creased by loose lending standards in the name of affordable housing. It turned out the country did need all that supply, it was just put on the market early.
So what happens now?
I believe there is another three to five year runway on housing growth. The “echo boom” in the birth rate generally runs through 1996 and not all 25 year olds have decided to gobble up suburban homes. According to Experian, first time home buyers had an average age of 34 in 2019. The pandemic and demand for space created from work from home may have shifted the average age a year or two younger, but we are still well inside this demand boom.
To make matters more challenging for the housing market, many of the echo boomers are enjoying such financial success they are buying second homes for their part time enjoyment!
Unfortunately I live in an area seeing both of these impacts, with a both vacation home demand and from a population influx from people relocating in work from home arrangements.
What about supply?
New housing starts have rebounded up to over 1.6 million in 2020. This is closer to the United State’s long term average, but not yet at the two million or more units that proceeded prior housing corrections. The good news is the United States can produce substantially all components that go into a home and historically low interest rates are driving growth in new construction. The two biggest points of resistance to new supply is labor and local zoning restrictions.
Where did all the houses go for sale?
The overall supply of homes for sale dropped dramatically in 2020. The foreclosure moratorium, lack of seniors moving into homes, and increased demand for space due to work from home and homeschooling created a demand side shock into an inventory shortage has struggled to recover. (The inverse of this shock was a short period of higher vacancies and softer rents in inner city multifamily properties) As of late 2021, the demand and supply look closer to equilibrium, which should slow the pace of growth in prices.
Senior Citizens: A regular supply of housing went missing
According to Morningstar, the average age of admission to a nursing home is 79. Combine this with the additional 10-11 year life expectancy of someone who is currently 75, and this puts most home sales from senior citizens exiting their homes between ages 79 and 85. There were very few births between 1942 and 1945 in the world. The oldest baby boomers turned 75 years old in 2021, meaning we have a couple more years before there’s an influx/return of supply from senior citizens moving from their homes.
We see this trend playing out in senior living communities. Not only do the demographics work against them, but the density of senior living communities have been a less attractive option over the past twenty one months. There’s also the challenge of seniors being willing to part with their accumulated stuff: Compulsive hoarding becomes a greater diagnosis after 55.
Eventually this source of inventory will ramp up, either when the baby boomers start moving to senior living or their homes become available upon death.
What’s the wild card in all this?
Immigration. Without wading too much into the politics, there is always the mathematical possibility of the United States increasing its immigration quotas. There has not been bipartisan immigration reform for 35 years and was last championed by a president who won re-election by 48 of the 50 states. Given the current political environment, it seems unlikely we will see a similar effort succeed.
So what can an early retiree or aspiring early retiree do?
Regarding the job market, if you’re still working, make sure you’re being paid market rates. The labor shortage is historic and everyone should be active on LinkedIn, talking to recruiters, and letting their network know they are open to opportunities. Knowing your market pay will help you get paid well at your current role and keep options open if you don’t get paid.
My view on housing is it’s an appropriate time for caution. I think the next couple of years will be good, followed by some challenges. The country is accelerating new housing starts into a slowing population, with deliveries at or above the long term average in 2021 and going forward. If you are considering buying, ask yourself if you are planning on staying for ten to fifteen years. According to the National Association of Realtors, the median homeownership tenure is thirteen years. Those owning for less than the median amount expose themselves to a risk of loss if the market corrects. Don’t buy more housing than you need. Part of achieving financial independence is making reasonable consumption decisions.
Ultimately housing is both a personal finance decision and a consumption decision. I think people have to balance the financial risks and benefits of ownership with what’s right for their lifestyle. If your intended hold period is below the median, there may be an elevated risk in purchasing today. If your hold period is longer, it likely still make sense to purchase at the current prices and lock in long term financing.