No Place like Home? The Future of the Housing Market

April 2012

Karen Leone de Nie: Welcome to the Federal Reserve Bank of Atlanta's Perspectives on Real Estate podcast series. I'm Karen Leone de Nie with the Federal Reserve Bank of Atlanta, and today we're talking with Dowell Myers, professor of the Sol Price School of Public Policy at the University of Southern California. Dr. Myers spoke to an audience at the Atlanta Fed in February 2012, sharing recent research on important demographic issues facing the nation.

This podcast will feature Dr. Myers's thoughts on the role of demographic forces on housing markets and the expectations for the future.

Dr. Myers, thank you for joining us today.

Dowell MyersDowell Myers: Well, thank you for inviting my thoughts.

Leone de Nie: I wanted to begin by asking, how has the country's demographic forces played a role in the most recent housing boom?

Myers: It's been building a long time. Really, this is the wave of baby boomers moving up the housing ladder through their whole life cycle for 30 years, and they're finally hitting the beach and the wave is breaking, but it's been building a long time. And it's been going on so long that we think it's normal, but really it all started in the 1970s when the baby boomers crossed age 25. That's what jump-started gentrification and the housing affordability crisis. It all began then and they moved up the ladder to more expensive housing ever since, and now they're getting to the point when they're thinking about retirement, and it's a new game now.

Leone de Nie: And when you say it's a new game now, what do you mean by that? What does the role of retirement of our baby-boomer generation mean for housing markets?

Myers: I think the problem is that people want to figure out what's "normal," or what's the "new normal." And there're all kinds of ideas about what it might mean. It might mean moving back to the city, having more apartments, less urban sprawl, changing the terms of mortgages, tightening up credit. What's normal? Well, it's not going back to 1990, and I think many people do assume that that is normal, but that's before, it's not the new normal. The new normal is a top-heavy age structure dominated by baby boomers who have got lots of equity in their homes, they've been homeowners their whole lives, and now they're looking to sell to somebody who can step up and pay the price. Somebody who doesn't have all that equity already and maybe doesn't have the same economic growth history in their careers that the baby boomers had. It may be somebody who's more often a minority person than the baby boomers themselves. That's whom they are selling to. We need to take steps to make the housing market stronger in that capacity. We need to cultivate the buying power of the next generation. That's what's holding the housing market up. That's what it's going to take for a recovery.

Leone de Nie: Actually, that leads to an interesting question. How do people react to housing prices because right now we are at historically low points in housing, pricewise, and doesn't that mean people are just more likely to buy?

Myers: Oh, it's a fantastic time to buy right now. Only one problem: the prices haven't been moving up, they've been moving down. And so every time that someone thinks about buying they get some news report that says that prices are down this month. The Case-Shiller index goes down or they hear it from the local realtors, and that puts the kibosh on buying. Why would you buy today if you could wait until tomorrow when it's cheaper? And so everybody is waiting for it to start to rise. So, it's a catch-22. It won't rise until people start buying. Once they do buy, then it will rise and then we'll have a snowball. But we can't get it started. Everybody is looking for what the trigger is to jump-start it, to make people start to buy.

The good news here is that there is a lot of pent-up demand; it's been delayed for about four years now. And that demand is going to be released in a surge, and when it happens that will push prices. And as it pushes prices my research shows with rising prices homeownership rates rise among young people. And when prices are falling, homeownership rates fall among young people. They will not buy if they do not think that prices are going up.

There are two things. There is the investment incentive—they want to purchase something that's going to make money. But, in addition, there's a fear that when prices are rising the train's leaving the station and if they don't jump on it now they are never going to be a homeowner. But right now there's no urgency that way at all; no one feels that way. Interest rates are rock bottom and prices are rock bottom, and there's no urgency. I do think that it would actually increase home buying when interest rates rise. Once people get the vibe that it's going to cost more next month if they don't buy today, then they will start to buy. They're on the fence right now waiting for a signal that it's time to go, and we haven't given the signal yet.

Leone de Nie: So currently the apartment market is getting stronger, and I'm wondering how are demographics at play in what is happening in the apartments?

Myers: Well, aren't the apartments the best news going? Really, for a long time they were just in the doldrums. All through the 1990s apartment construction just really sagged, and it's such good news that it has perked up now. It might be that these are refugees from the home buying market, and there are refugees there, no doubt about it. But underneath it, though, there is a major demographic change, which was long predicted.

You know, demographers are real smart. We're not like economists; we can predict 10 years ahead. Economics is the most important thing, I grant, but we don't know interest rates 10 years ahead. We don't know house prices or incomes 10 years ahead. But I know that 10 years ahead all these school kids are going to be 10 years older, that's how I can predict ahead. And what happens is that apartment markets are driven, new construction is driven by people in their twenties. You had to have growth with people in their twenties. Those are middle-class people in their twenties who will pay the new rents, high rents for new construction. If you don't have growth in their twenties you can't get construction. And we had the baby-bust generation located in the age 20 range during the 1990s and we lost in absolute numbers. We lost people in their twenties. It took the bottom out of the market. And now that we had the baby-boom echo, the children of the baby boomers have now grown up and they're crossing age 25 today, that generation is what's fueling the demand for construction. There are more people.

The basic rule of demographics is, "You can't fill up real estate if you don't have enough bodies." You've got to count the bodies. It's not the money that buys real estate; money is a tool used to buy real estate. But you have to fill it up. An investor buys a house; he has to fill it up. You have to occupy it with a tenant. So you've got to count the bodies.

And different age groups prefer different types of housing in different locations. So right now we're following this wave and it's going to go on for about 15 years, filling up from 20 to 35 roughly, that age range. It's very strong right now. But they will move on, and they'll move on to buying houses, a lot of them in the suburbs. They'll have kids and they'll have kids in school, and they'll be buying larger houses, and they'll be leaving the apartments behind again. But that won't happen for another 10 years. It's useful to think ahead; otherwise, we're just building housing and buying housing and we don't know where it goes, that's how we overshoot. If we don't track that, we're putting ourselves in jeopardy.

Leone de Nie: So what do we need to think about as we plan for delivering new housing?

Myers: As we come out of the recession into a recovery we need to look at what age group the people are in. It's not just the total people. It's the age groups and how that matches up with the supply of housing. Currently, we have a lot of very large suburban housing that we built. Why? We built it for the baby boomers when they were parents of teenage kids. There were lots of them and they needed lots of space. We built all that housing. The parents are now empty nesters. The kids have left home; the kids are in the apartments. The kids aren't going to buy those big houses in the suburbs, not yet. So there is a gap here right now and we may have overflooded that segment of the market while we've underbuilt other segments, and we just have to figure out how to line things up.

We have to think ahead, because that house is going to last a long time. And it's going to pretty much stay where it is, too, in that location. So, we need to become better forecasters and imagine how the supply of housing needs to grow to match the growth in the population, not just the total numbers, but the growth in age groups, because it's the surplus housing seekers in a given segment that drive new construction. If on average there's no growth you can still have lots of housing demand because you have a surplus in certain segments.

So, I think we need to watch that and look at what our existing inventory is. We're not starting from zero. We have a stock of housing that's available. And I think every local planner, every local mayor wants the housing in their city to be filled up. They don't want it to be abandoned, and so we don't want to overshoot and oversupply construction. We want to supply construction where it's needed—in the right segments and the right locations. So it's an interesting question of inventory management, of really using our census data, which is pretty good, on tracking the number of housing units by how many rooms are in the units and what the price brackets they're in and how old they are. We can track that much better than we have. I think in the past we've just sort of, it's been very laissez-faire and we sort of hope things will work out, and then we have remedial programs when there's a disaster. But we should be able to foresee better the problems that are coming and head them off at the pass. It's much cheaper to be preventive than to be remedial.

Leone de Nie: You've been talking about how age influences housing markets. So, in closing, I'm just wondering are there other demographic forces that policymakers, developers, and others should be talking about.

Myers: Well, I do emphasize age a lot, I confess. It's because the baby boomers are everywhere and it cuts across all the markets. But the additional thing that is talked about a lot is immigration. You hear that in public dialogue a lot, and it's certainly very prominent in the minds of homebuilders and other housing analysts because the biggest variable in forecasting future household formations is the level of immigration. How many new people are we going to be bringing to the U.S. has a big impact on how many new households will be occupied, and how many apartments that is, or how many homes for sale.

So, we need to know that. But that's very localized because immigration is not spread evenly across the country; it's in pockets. It can be a very big deal in New York, and LA, and Atlanta, but maybe not so much so in Athens, or in Tallahassee, or Jacksonville. So it's quite variable. But immigrants are the shot in the arm because they come in and they have to live somewhere initially, but over time they settle in and they assimilate and it's extraordinary how rapidly their homeownership increases. From very low levels it shoots up threefold, like 60 percent, within 30 years, and so they're crucial. But, more than just immigrants themselves, their children are crucial. And in California we're all asking questions; we're all really concerned about the housing recovery. And the big question is, "Who's going to buy your house?" And the answer, increasingly, is that it is going to be an immigrant who buys your house. They account for a very large share of the growth in homeownership in the nation, about 25 percent of the growth is foreign born, and in California it's about 100 percent of the growth. So, there are benefits to be gained from immigration that people don't think about until they try to sell their house and then it might become obvious.

Leone de Nie: Dr. Myers, thank you for joining us today.

Myers: This has been great. Thank you.

Leone de Nie: This concludes our podcast with Dr. Dowell Myers, a demographer, urban planner, and professor at the University of Southern California. For more podcasts on this topic and others visit the Atlanta Fed's website at If you have comments or questions, please e-mail, and thanks for listening.