Wednesday, September 2, 2015

Housing Tax Policy, A Series: Part 57 - It's Demographics, Housing Edition

The MBA report on housing demand that I referenced in yesterday's post included age-specific home ownership numbers, as of 2014, for ages up to 54 years old.  I decided to check demographic effects on homeownership by using these ownership rates as a benchmark, and apply them to census estimates of population by age over time.  I used only 25 to 54 year olds.

First is a graph of actual homeownership rates, quarterly.

Next is the homeownership rate we would expect to see of 25-54 year olds, assuming 2014 ownership rates for each age group.  In other words, the second graph shows how changing age demographics over time affected aggregate homeownership rates, assuming that the ownership rate of each age group has been stable.

It looks like homeownership rates were rising in the 1970s in spite of strong demographic trends pushing expected ownership rates down.  Demographics may have hidden the strong rise in homeownership demand created by inflationary factors.

On the other hand, demographics were pushing homeownership up in the 1990s and 2000s.

In the next graph, I have charted the actual homeownership rate.  Then, I have adjusted the actual homeownership rate with the ratio of the changing 25-54 year old aggregate rate given in the first graph.  Once we have adjusted for demographics, we see that the rise in homeownership in the 1970s was stronger than the rise in the 1990s and 2000s.  Once we account for demographics, we may not need much of an explanation for rising ownership after 1995.  I have previously argued that the rise in homeownership rates did not correlate that strongly with rising prices in the 1995-2005 period.  I had argued that if the rise in ownership in the mid-to-late 1990s was attributable to public programs like the CRA, those programs did not cause home values to rise relative to rents, because much of the increase in homeownership rates happened before home prices began to rise.  This demographic data suggests that public programs like the CRA may have had much less of an effect, even on homeownership rates, than it appears, at first glance.  A demographic explanation also explains how homeownership rates were rising in the 1990s and 2000s without any significant decline in homebuyer financial characteristics.  Demographically, there were simply more households naturally in a position to be owners.


  1. Egads, obviously! I had never thought about that. Yes, there was a bulge in the age group of people looking to buy a home, start a family, build capital for retirement, make money etc.

    Great post.

    1. Thanks, Benjamin.

      The thing that surprises me the most is the comparison between the 2000s and the 1970s. It is natural to assume that there were limits to demand for homeownership because of high interest rates. I originally assumed that this was an important factor in the rise of home prices in the 2000s - a bidding away of the excess returns created by limited access. But, this is beginning to look like a non-issue. In the 1970s, with double digit mortgage interest rates and very unfriendly demographic trends, homeownership and price/rent levels were rising. I began this project thinking that housing markets were generally more efficient than they are given credit for, but it is looking like they are even more efficient than I was giving them credit for.

  2. When I bought my first condo in a Chicago suburb in 1980, there was a HUGE amount of "creative" financing going on. With mortgage interest rates in the 17-18% range, I "assumed" the seller's mortgage which was at 9%. I did this for a couple years, until I could refinance my own loan at 10%. Lots of people were doing these deals.

    1. Interesting. Now there is a time where negative amortization would have been useful.

      Avg. market 30 year mortgage rates hit 16% in 1980, but effective rates topped out at about 10%. Probably partly because of some of the "creativity" you mention. Mostly because of aging fixed rate mortgages. Even so, I think it is telling that homeownership rates were rising against this and unfriendly demographics.