The baby boom, the baby bust, and the housing market

This paper explores the impact of demographic changes on the housing market in the US, 1st by reviewing the facts about the Baby Boom, 2nd by linking age and housing demand using census data for 1970 and 1980, 3rd by computing the effect of demand on price of housing and on the quantity of residential capital, and last by constructing a theoretical model to plot the predictability of the jump in demand caused by the Baby Boom. The Baby Boom in the U.S. lasted from 1946-1964, with a peak in 1957 when 4.3 million babies were born. In 1980 19.7% of the population were aged 20-30, compared to 13.3% in 1960. Demand for housing was modeled for a given household from census data, resulting in the finding that demand rises sharply at age 20-30, then declines after age 40 by 1% per year. Thus between 1970 and 1980 the real value of housing for an adult at any given age jumped 50%, while the real disposable personal income per capita rose 22%. The structure of demand is such that the swelling in the rate of growth in housing demand peaked in 1980, with a rate of 1.66% per year. Housing demand and real price of housing were highly correlated and inelastic. If this relationship holds in the future, the real price of housing should fall about 3% per year, or 47% by 2007. The theoretical model, a variation of the Poterba model, ignoring inflation and taxation, suggests that fluctuations in prices caused by changes in demand are not foreseen by the market, even though they are predictable in principle 20 years in advance. As the effects of falling housing prices become apparent, there may be a potential for economic instability, but people may be induced to save more because their homes will no longer provide the funds for retirement.