Feb072012

Did loan owners stop having sex due to the housing bust?

A new study shows a strong correlation between house prices and birth rates. When the housing bubble inflated, so did… well, birth rates. When housing went flaccid, so did… birth rates. When housing began to inch up in 2009, so did… birth rates. The correlation is so strong, studies postulate a cause and effect. So I ask you, did loan owners stop having sex due to the housing bust?

Housing Bust, Baby Bust

Fertility falling: And baby makes three.

The collapse in the housing market is bad for fertility, which could imperil long-term economic growth.

By Jim Tankersley

Updated: February 4, 2012 | 9:34 a.m.
February 2, 2012 | 6:00 p.m.

Say you bought a sprawling ranch-style house in 2007, with a guest room just begging to be turned into a nursery. If you lived in Las Vegas, that house today would probably be worth barely a third of what you paid. If you bought in Phoenix or Miami or Detroit, it would be worth about half your purchase price. In every case you’d most likely be underwater on your mortgage, with no hope of tapping your equity for a loan to defray the cost of a new crib and Winnie-the-Pooh wallpaper. Ask yourself: Is that the sort of world into which you’d want to bring a child?

No way, economists suggest—at least not compared to the world at the height of the housing boom.

As couples face a recession and a possible loss of income, they become more fiscally conservative, and many consciously delay procreation. But the problem is not only in their mind. I think part of the drop in birth rate is primal. Believing they are rich and empowered makes men lascivious. Facing the reality they are broke and helpless lessens libido.  It’s just the way men are.

An emerging set of economic research shows that rising housing prices lift the fertility rate, too. Amid the current housing crash, in contrast, birth rates are falling like a Slinky descending the stairs. This could be bad news for the American economy and for the financing of social services in decades to come. Even a modest decline in fertility could stick the United States with the sort of aging pains that Europe and Japan are grappling with today.

If the ratio of workers to those receiving benefits drops, then taxes must go up on the workers, or benefits must be curtailed. Neither option is palatable. Today’s babies will be paying my social security benefits — assuming there are benefits when I get there.

The link between home values and family values is borne out by complex mathematical formulas developed by two University of Maryland economists, Lisa J. Dettling and Melissa Schettini Kearney. It starts with the simple calculation that every prospective parent makes: Can I afford to raise a child? (Or, for current parents, another child?) Helpfully, the Agriculture Department annually tallies up the costs of child-rearing. For a typical married couple, the department said in its latest report, housing accounts for a third of those costs—as much as food and child care combined.

You might think, then, that rising housing prices might discourage would-be parents. That appears to be true for people who figure they’d need to buy a home to accommodate a baby. Indeed, among renters, a 10 percent rise in housing prices reduces the fertility rate by 1 percent, Dettling and Kearney reported in a paper late last year. But that change, the economists found, is swamped by a reverse effect among couples that already own homes: A 10 percent rise in housing prices increases homeowners’ fertility by 4.5 percent. That’s because rising prices make homeowners feel wealthier. Thinking of their home as a nest egg, they save less and spend more, and they can borrow against their equity.

So Ponzis had more children. Great. Like we need more of them… not.

Homeowners use some of that newfound wealth, according to evidence that Dettling and Kearney cited, “to fund their childbearing goals.” Similarly, a recent paper by Purdue University economist Keith Mumford and Cornell’s Michael Lovenheim concludes that the “large recent variation in the housing market could have sizable demographic effects that are driven by the positive effect of housing wealth on fertility.”

Am I the only one appalled by the idea that couples believe the house is supposed to support their children? Is rising house equity supposed to pay for children’s sports activities growing up, their car when they turn 16, their college education later on? I find this idea insane, but apparently much of America has come to accept it as an entitlement — an entitlement we need to reinstate by reflating another housing bubble. No need to work and produce anything. No, Americans merely want the appreciation fairies to do the work for them.

These days, this bodes poorly for the birth rate—and for the economy. The drop in home values from 2006 to 2010, Dettling and Kearney found, corresponded to a 4.3 percent decline in births. And when housing prices plummet, as they have since the real-estate bubble burst in 2007, homeowners spend a lot less.

I can’t say I am surprised loan owners are not spending today like they did during the bubble. Once they blew through the unsustainable borrowed money, they are only left with debt and debt service payments. Not much disposable income is left over.

This goes far to explain why the U.S. economy has struggled to regain its stride after the Great Recession and also why the Obama administration—after years of fumbled efforts to help stabilize the housing market—released a proposal this week to help underwater homeowners refinance their mortgages at lower rates.

It isn’t right to say Obama’s housing policy has failed. Obama’s housing policy has lead to unprecedented affordability.

Prices continue to decline nationwide, according to the Case-Shiller housing index released this week—and so does the birth rate. After reaching a recent peak of 2.1 babies per woman in 2007, the nation’s fertility rate has shrunk to 1.9 babies per woman, according to the Census Bureau. The states where prices have plunged the most—led by Nevada, Arizona, and Florida—have also seen their fertility rates fall more sharply than in any other state.

The correlation between house prices and birth rates is remarkable. The bubble rally was much more fun for loan owners than the bubble bust.

People suffer in direct proportion to their unfulfilled sense of entitlement. Unfortunately for loan owners, the housing bubble gave them an enormous sense of entitlement, so now they are suffering terribly.