Nov 2nd 2010, 15:31 by R.A. | LONDON
I THOUGHT I made a pretty nice point on Sunday concerning the way amateurs fuel housing bubbles. I wrote then that it asn't amateur participation in the market that made prices bubbly; rather it was the influx in new amateurs, which allowed the Ponzi-like bubble to keep inflating. As evidence, I cited the unusual rise in the homeownership rate during the 2000s from 67% up above 69%. Unfortunately for me, Calculated Risk has gone and put up a chart that complicates the story:
As you can see, there's an even larger increase in the homeownership rate from the early 1990s to 2000, of nearly four percentage points, than we observe in the bubble decade. Now, this doesn't mean my earlier story was wrong (you thought I'd say that). Bubbles often begin with a "real" shift in fundamentals that generates upward price pressure. The tech boom began with a wave of investment in new, productivity-enhancing technologies. It could be that the housing bubble of the 2000s was rooted in an earlier fundamental shift.
Like what? The generation that fought World War II famously came home and produced a baby boom—an unusually large cohort of births between the mid-1940s and mid-1960s. From the early 1980s to the mid-1990s, these Baby Boomers were entering middle age and generating an echo boom of their own. Prime child-rearing age also happens to be prime homebuying age; the rate of homeownership jumps substantially as one moves from twentysomethings to thirtysomethings. In other words, much of the increase in the homeownership rate observed in the 1990s was likely rooted in a change in the composition of the population—from groups less likely to own homes toward groups more likely to own homes.
This increased demand would nonetheless have run up against supply limits to generate rising prices, and rising prices generated new enthusiasm for participation in the housing market. What turned this enthusiasm into irrational exuberance, however, was the massive credit growth of the 2000s and the innovations that increased the pool of potential homeowners. In the 1990s homeownership increased because more people were moving into the "typical homeonwer" category. In the 2000s homeownership increased because the "typical homeowner" category was broadened to include new people.
As it turned out this broadening was not sustainable, and when the pool of potential borrowers was finally empty the homeownership rate (and prices) fell substantially. What will be interesting to observe is whether some of the underlying increase in demand for homeownership is also reversed. Boomers are now approaching retirement age, and homeownership rates decline slightly among those over 65. The echo boomers are now young adults, but their household consumption patterns may be significantly different from their parents'. They're likely to marry later and have fewer children, and they may be turned off from homeownership by the crisis. Rates of homeownership could begin a long secular decline.
The effect of that decline on prices will depend on the extent to which existing supply can be shifted from owner-occupied to rented. Where this shift is slow to take place, the slump may persist for quite a long time.
theconomist.com/blogs/freeexchange
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Like what? The generation that fought World War II famously came home and produced a baby boom—an unusually large cohort of births between the mid-1940s and mid-1960s. From the early 1980s to the mid-1990s, these Baby Boomers were entering middle age and generating an echo boom of their own. Prime child-rearing age also happens to be prime homebuying age; the rate of homeownership jumps substantially as one moves from twentysomethings to thirtysomethings. In other words, much of the increase in the homeownership rate observed in the 1990s was likely rooted in a change in the composition of the population—from groups less likely to own homes toward groups more likely to own homes.
This increased demand would nonetheless have run up against supply limits to generate rising prices, and rising prices generated new enthusiasm for participation in the housing market. What turned this enthusiasm into irrational exuberance, however, was the massive credit growth of the 2000s and the innovations that increased the pool of potential homeowners. In the 1990s homeownership increased because more people were moving into the "typical homeonwer" category. In the 2000s homeownership increased because the "typical homeowner" category was broadened to include new people.
As it turned out this broadening was not sustainable, and when the pool of potential borrowers was finally empty the homeownership rate (and prices) fell substantially. What will be interesting to observe is whether some of the underlying increase in demand for homeownership is also reversed. Boomers are now approaching retirement age, and homeownership rates decline slightly among those over 65. The echo boomers are now young adults, but their household consumption patterns may be significantly different from their parents'. They're likely to marry later and have fewer children, and they may be turned off from homeownership by the crisis. Rates of homeownership could begin a long secular decline.
The effect of that decline on prices will depend on the extent to which existing supply can be shifted from owner-occupied to rented. Where this shift is slow to take place, the slump may persist for quite a long time.
theconomist.com/blogs/freeexchange
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