The housing headwind nobody saw coming

Retiring baby boomers helped lower the labor participation rate, and with fewer workers, housing demand is far less than it should be.


During the housing bubble, many astute observers of the market outlined the various reasons housing was going to crash: mortgage resets, delinquencies and foreclosures, and an economic contraction caused by the collapse of mortgage equity withdrawal spending. While these obvious problems came to the forefront, a less obvious housing headwind went unnoticed, and now this headwind holds the market down: retiring baby boomers. panic

Ordinarily when someone retires, a new worker is hired to take their place. Similar to a move up market, a retiring senior often vacates a high-level position in an organization, and hiring a replacement causes a chain of move-up hires as people receive promotions to fill vacant spaces up the hiring ladder. That works unless an unusual demographic shift (perhaps exacerbated by an economic recession) causes the chain of promotions to stop and jobs are eliminated permanently.

The elimination of jobs and the lack of promotions keeps wage growth down, and it causes a shortage of potential buyers in the housing market. In other words, if new workers don’t enter the workforce, the housing market also lacks buyers for the Baby Boomer’s homes.

Why rising wages might be bad news

By Matt O’Brien February 25show_us_the_money

It only took seven years, but the economy is almost back to normal.

Emphasis on the word “almost.” Unemployment, long-term unemployment, and shadow unemployment aren’t, as Fed Chair Janet Yellen told Congress on Tuesday, all the way back to where they were before the crisis, but they’re getting close. Even better, people are feeling a little more confident about quitting their jobs. Put it all together, and wages should start rising more soon, from the anemic 2.2 percent they are now to the 3.5 to 4 percent they should be.

Well, maybe. It depends on how much shadow unemployment is left. That’s everyone who’s not officially “unemployed”—not working, but actively looking for a job—but basically is. That includes people who have part-time gigs but can’t find the full-time ones they want or have given up looking for now, but will start again once things look better. It’s hard to get a handle on how big a problem this is, but one of the better measures is the labor force participation rate. It tells us the percent of people who have or are looking for a job. And it’s not normal. It’s at a 35-year low.


Now a lot of this was inevitable. The participation rate was always going to fall when the Baby Boomers started retiring.

If this was inevitable, if this was a fact everyone knew was going to happen, why wasn’t anyone writing about the impact this demographic shift would have on the labor and housing market? A drop in labor force participation is also likely to cause a drop in home ownership rates because new potential homebuyers fail to get jobs, form households, and buy real estate.unemployed

The crisis, though, has made it fall even more than that—but just how much is hard to say. The White House, as you can see above, calculates that about half the decline is due to aging, which is in line with other estimates. Another chunk is due to the crisis. And the rest is unexplained. (That’s the blue part of the graph). It could be that people went back to school to wait out the recession. Or that people went on disability when it didn’t look like any amount of waiting would be enough. Or that the long-term unemployed became unemployable. In any case, the question is how many of these people are coming back—and how we even tell if they do?

This question is important for many reasons. First, if the level of residual unemployment is high, then wage growth will be anemic until all the discouraged workers go back to work. Current workers won’t have leverage to demand higher pay if many unemployed are still looking. However, this has a good long-term effect: discouraged workers who find new jobs form new households and increase overall housing demand.Unemployed-Man-Poster

A large number of discouraged workers will blunt housing demand in the short term but boost it in the long term. Further, the overall quantity of demand is important to baby boomers that want to sell their houses and downsize in retirement.

Sticker shock stalls downsizing boomers

Diana Olick, Friday, 27 Feb 2015

…Boomers were expected to downsize out of their large suburban homes, bringing much needed inventory to the market. …

They are therefore staying put longer, and causing a huge shortage of available inventory for the overall housing market.

Many of these boomers are trapped in their existing homes by excessive mortgage debt, the real reason listings are so low.

Renting isn’t much an option either with rents nationwide at record highs.

“Fifty percent of boomers feel like they can’t get out of their house, and that’s limiting supply,” said Jane Fairweather, …

They are trapped if they are unable or unwilling to pay off the mortgage.


“So the houses that we’re waiting to come on the market, for the young families that are trying to move into the good school systems and the good neighborhoods, aren’t coming on.”

There were 9 percent fewer homes for sale in January of this year than there were one year ago, according to

That, in turn, is pushing prices higher for the homes that are listed, because those homes are now seeing bidding wars.

Restricting inventory to create bidding wars is exactly what lenders want. They need to reflate the housing bubble to bail out their bubble-era loans.withheld_inventory

Higher prices are then sidelining first-time and even midlevel buyers, in something of a vicious circle.

“We were a bit shocked at the prices, yes,” said Howard Sokolove, also a resident of Bethesda.

The Sokoloves decided to stay put as well, although they worry about aging in a house with stairs and a large yard that needs upkeep.

“I’m learning to love what I’ve got,” he said.

If the economy were strong and unemployment low, retiring baby boomers would probably cause wages to rise rapidly because labor markets would tighten due to lack of available labor in the smaller generations that followed. Rising wages in turn would provide more borrowing power to subsequent generations who would dutifully buy the baby boomer’s homes. Perhaps the somewhat smaller generations might limit demand for new construction, but prices on existing homes would remain high.

For the last 8 years, the economy has not been strong, and although I expect 2015 to be better, housing won’t see a boost until discouraged workers find jobs and wages rise.

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