Plunkett: Housing May Be Down, but Demographics Will Provide Spark

Plunkett: Housing May Be Down, but Demographics Will Provide Spark
November 3, 2011

Steve Stanek

Steve Stanek (sstanek@heartland.org) is a research fellow at The Heartland Institute and managing... (read full bio)

(Editor’s note: Jack W. Plunkett sees good demographic trends for housing and related fields in the years ahead. He is CEO and publisher of Plunkett Research, Ltd., a Houston-based provider of business and industry research to corporate, library, academic and government markets. He is also the author of more than 30 books on business and industry, including his newest, The Next Boom: What you absolutely, positively have to know about the world between now and 2025 [BizExecs PressTM, 2011].

The Heartland Institute recently interviewed Plunkett regarding U.S. Census Bureau figures showing the percentage of Americans who owned their homes has seen its biggest decline since the Great Depression. Despite the falling numbers, he says there is reason for optimism over the long term.)

By Steve Stanek

Heartland Institute: The U.S. Census Bureau recently reported the rate of home ownership fell to 65.1 percent in April 2010, 1.1 percentage points lower than it was in 2000, and down more than 4 percentage points since 2004, when ownership peaked.

What message do you think this decline is sending?

Jack W. Plunkett: Home ownership was driven to unsustainable levels during most of the recent economic boom, particularly from 2002 through most of 2006. This was due to a number of factors, most of which were very undesirable. To begin with, the federal government actively encouraged lending to lower-income homebuyers. Unfortunately, many of those homebuyers had neither the financial resources nor the knowledge required to own, support and maintain a home over the long term.

Federal agencies, along with the banking industry, supported low- and no-down payment mortgages, while Congress encouraged banks to ease lending requirements. Meanwhile, the Federal Reserve ushered in several years of low interest rates after the brief recession in the early 2000s, making mortgages more and more affordable.

The private sector picked up the ball and ran with it, setting up procedures for lending to borrowers with undocumented income, securitizing large pools of mortgages, and devising ways to give those pools top bond ratings. It was all a house of cards. American household debt as a percent of disposable soared from 67 percent in 1980 to 133 percent in 2007. A commonly thought of maximum sustainable ratio of such debt is 100 percent. The writing was on the wall for quite some time to those who knew where to look.

HI: Is it good that the demand for rental properties is up? Is this perhaps more realistic for many people than trying to buy a home?

JWP: Certainly, there are a lot of people who are reluctant to buy a home due to their recent experience or recent observations of the housing market. The apartment market will likely remain strong for some time, despite the fact that home prices are down dramatically and mortgage rates are at historic lows.

One very positive, long-term trend for both apartments and homes is the maturing of the immense Generation Y—people born from 1982 through 2002. These Americans are currently nine to 29 years old. As they continue to mature, once the employment market finally firms up, they will cause a huge spike in household formation that will be extremely positive for both the real estate industry and for retail sectors that sell household goods.

HI: Interesting observation about Generation Y. Want to expand on how you think Generation Y might affect the U.S. housing market and economy?

JWP: One of the greatest strategic advantages America possesses is Generation Y. This group totals roughly 91 million, making it the biggest generation in America’s history—20 percent bigger than the Baby Boom generation.

I say they are a tremendous advantage because America will have this vital young workforce to rely on. America’s population has been growing steadily, although that growth slowed with the onset of the recession. We had been adding about a net 2.8 million people yearly in recent years, about two-thirds from native births and one-third through immigration. In fact, America has been one of very few developed economies with a positive fertility rate. 

HI: What are the implications?

While population is aging rapidly in much of the world, the U.S. will have a growing consumer base, rapidly increasing household formation and a steady flow of young workers to offset the aging of Baby Boomers, thanks largely to Generation Y.  This is a sharp contrast to Japan -- where the population will actually shrink 12 percent by 2050 -- Russia, most of the EU and much of Asia. To some extent we’re better off than China, where the workforce will begin to shrink by 2015 or 2016 thanks to the one-child per family policy. This means the ratio of working-age people to seniors is going to look much better in America than in most of its trading partners.

What we need now is some effective leadership that leads to more confidence, both business confidence and consumer confidence.  There is eventually going to be a lot of pent-up demand for replacement in everything from business and industrial equipment to cars, aircraft and construction.  Confidence would help ignite that demand, at least in the U.S. Europe is a different set of problems. 

Meanwhile, American households are deleveraging and are much more conservative in financial matters. Surveys consistently show that Americans are focused on reducing debt. This will eventually lead to more stable households and personal balance sheets. 

Steve Stanek

Steve Stanek (sstanek@heartland.org) is a research fellow at The Heartland Institute and managing... (read full bio)