A demographic depression

When I read the newspapers from the 1930s I’d occasionally see hopeful articles about how consumer spending would have to pick up soon, because of all the “pent-up” demand.  If people hadn’t been buying cars for a while then presumably their cars would wear out, and this would trigger new demand for replacements.  Of course I knew that there actually was no light at the end of the tunnel, which made these articles seem slightly pathetic—as if they were grasping for straws.  They overlooked the fact that the depression made America much poorer, and that low consumer demand reflected that poverty.  For similar reasons, there isn’t much “pent up demand” for cars in Somalia, despite low sales in recent years.

Sometimes I see this argument applied to the housing slump.  Housing construction is down 70%, to levels far lower than at any time in post-war history (relative to population.)  And this slump has been going on for a number of years.  Surely we’ll soon need to build more houses, to meet our growing population.  If only that were true.  Unfortunately, as sharply as housing construction has fallen, household formation has fallen even faster.

Jim Glass sent me some very interesting data on household formation, which casts a very different light on the recent housing crash.

By my simple measure recent housing starts peaked with an inventory of 40% of an average year’s worth of starts above the trend line in 2007. That’s a cyclical high but a typical one. About the same or a little higher was reached in three other cycles since 1960.

But the plunge in starts since 2007 is unprecedented “” by the end of 2010 cumulative starts were 72% of an average year’s worth of starts below trend. The next-lowest figure was 46% below trend back in 1970. If things were “normal” this would predict a huge boom in housing starts soon.

But housing starts are *following* household formation, which is plunging even faster, like an ICBM heading straight to its target.

In 2007 household formation was 1627k (average 1998-2007: 1499k) and housing starts were 1355k (average 1998-2007: 1716k). In 2010 household formation was all of 357k, down 78% from 2007 and down 76% from the prior ten year average. Housing starts were 587k, down 57% from 2007 and down 66% from the prior ten years. That’s a big fall, but it is still *well behind* the fall in household formation.

If I still had my blog I’d post the graphs “” the line for household formation is heading straight down like to the bottom of the sea, it’s three times the fastest-deepest decline of the last 40 years. The line for housing starts looks like it is just striving to not fall too far behind.

I hate to be the bearer of bad news, but that light at the end of the tunnel is an onrushing train called falling household formation.  It’s caused by three factors:

1.  Less immigration due to the post-2006 crackdown.

2.  Less immigration due to the severe recession and high unemployment

3.  20-somethings who can’t get jobs are living with their parents.

The problem is not that we built too many houses and need to work off the excess.  Yes, we did, but we worked off that excess long ago.  No the current problem is crashing demand for homes due to an unprecedented plunge in household formation.  Call it a demographic depression.  And the root cause?  I know I’m going to sound like a broken record, but the biggest cause in low NGDP (although obviously other factors are also at work here–including immigration crackdown, minimum wage increase, extended unemployment insurance, etc.)

PS.  I can’t wait for some smart alec commenter to write in and tell me the minimum wage increase can’t possible affect household formation, as no one can afford to live by themselves on the minimum wage.  I already look forward to slapping you down.  So go ahead and make my day.

PPS.  This website shows that the Census had forecast household growth of about 1.1% per year.  In this website you can find the data Jim used; only a 0.3% growth in household formation last year.  And it’s possible the Census is a bit behind the curve, as for instance they didn’t catch up to the 1990s immigration surge until the 2000 census.  Thus it might be even worse than Jim’s figures show.

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67 Responses to “A demographic depression”

  1. Gravatar of Steve Steve
    18. July 2011 at 04:24


    Any chance you could post the graph that Jim Glass could not?

    Also, it’s not just falling household formation, it’s also falling birth rates (so no families to raise, feed, etc.)

    I can’t find timely data on birth rates, but here’s a good article:


  2. Gravatar of Morgan Warstler Morgan Warstler
    18. July 2011 at 04:31

    Jesus Kee-Ryst! You aren’t seeing the big picture Scott.

    People are living at home BECAUSE RENT IS TO DAMN HIGH.

    Forget home ownership. Forget starts.

    There are 12M homes that should be renting AT A PROFIT for 1/3 of what of the last mortgage payment.

    To do that you just need to force 12M houses into $1 auctions, and let the guys with cash have them for 20%-25% (that’s what market is bearing right now) of last sale price.

    Look Scott, I have a direct line of knowledge into this stuff…. I watched a firm be created – now in their third fund, that just buys houses on court house steps in SoCal.

    As a guy who wants to move there, you should be investing.

    They have bid on 30K homes and won maybe 5% of those bids. They now have hundreds and hundreds of rentals.

    Fact: in more than 50% of the cases, the old mortgage holder becomes the renter.

    Fact: they have 96%+ occupancy running back 2.5 years.

    Fact: they have no problem raising funds.

    Fact: the banks are still sitting on inventory, letting millions of people slide – making no payments, because the banks have BEEN PROPPED UP BY QE and TARP, and the banks want to keep the hard assets as long as possible, so they don’t have to liquidate the market.

  3. Gravatar of Secondary Sources: Fannie and Freddie, Household Formation, European Crisis – Real Time Economics – WSJ Secondary Sources: Fannie and Freddie, Household Formation, European Crisis - Real Time Economics - WSJ
    18. July 2011 at 05:58

    […] […]

  4. Gravatar of Aaron Aaron
    18. July 2011 at 06:15

    I’ll volunteer to be the smart-alec for that minimum wage comment – is there any way to estimate the size of the effect of the minimum wage increases on household formations? At its peak unemployment doubled over pretty much every category – has household formation slowed as much in higher income brackets as in lower? How do the minimum wage hikes affect individuals in the middle of trying to deleverage their debt? Is there a split in the market market such that raising the minimum wage helps those fortunate to have a job but hurts the long-term employed (a la Tyler Cowen’s “ZMP worker” argument)? How many people are trying to start a new household on minimum wage anyway?

  5. Gravatar of Andy Harless Andy Harless
    18. July 2011 at 06:32

    Why would extended unemployment insurance reduce household formation? Presumably if you took away extended unemployment insurance, some of the people now receiving it would accept jobs that they are not currently accepting and would therefore be slightly richer and might in some cases qualify for mortgages where they otherwise wouldn’t. However, I’m sure the vast majority of those dropped from UI would either keep looking unsuccessfully for work or drop out of the labor force. In either of these cases, their income would be lower relative to what they receive from UI, and it would be harder — not easier — for them to form new households. Moreover, the ones that did accept jobs would often be people who have already formed households and would in many cases displace new entrants who have not yet formed households and who would have formed households if they had gotten jobs. Without even accounting for multiplier effects, it seems clear to me that extended UI will tend to increase, rather than decrease, household formation. You can maybe tell as story where extended UI reduces household formation, but it requires an empirically implausible set of parameters.

  6. Gravatar of martino martino
    18. July 2011 at 06:34


    Scott, here: http://tinyurl.com/3z62m7f can you spot the differences between 1933 and today?

  7. Gravatar of Scott Sumner Scott Sumner
    18. July 2011 at 06:37

    Steve, I don’t have the graph, otherwise I’d post it. If someone sends it to me, I’d post it. Thanks for the birth rate data, I’d guess it declined again in 2009.

    Morgan, The “housing starts” data considers both apartments and single family homes to be “homes.”

    Aaron, Thanks for volunteering. The higher minimum wage slows the formation of new businesses that use lots of minimum wage workers. For instance, less people eat out. But those businesses also use plenty of non-minimum wage workers (management, construction of new McDonalds, advertising, etc. So by slowing the growth of minimum wage intensive businesses, you also reduce job opportunities for those making much more than the minimum wage.

    During this recession youth unemployment rose to levels well above the 1982 recession, even though the overall unemployment rate never got up to 10.8%. I think there is plenty of evidence that the minimum wage has affected youth/unskilled unemployment. Unemployment for college grads is actually pretty low right now–that’s not the main problem, although it is a problem.

  8. Gravatar of Scott Sumner Scott Sumner
    18. July 2011 at 06:52

    Andy, See my answer to Aaron, The same principle applies. If UI is raising the unemployment rate, and reducing UI lowers unemployment, then it will lead to economic growth. This will also create jobs for people not currently on UI.

    Second, if the Fed is inflation-targeting (which it is to at least to some extent), ending UI would cause the Fed to increase AD, in response to a rightward shift in AS.

    Third, the affordability of mortgages it relevant to my argument. Lots of 20-somethings live at home because they have no job. If they get a job it causes them to move into their own apartment, which leads to more housing starts (apartment construction.)

  9. Gravatar of Scott Sumner Scott Sumner
    18. July 2011 at 06:53

    Martino, Thanks. Years ago I published some articles on Fisher’s reflation plans.

  10. Gravatar of Morgan Warstler Morgan Warstler
    18. July 2011 at 07:12

    Scott, you are not even responding to my point.

    It has nothing to do with “housing starts”

    You now have to explain WHY my point that is has NOTHING to do with housing starts is wrong.

    Well, Morgan why does it have nothing to do with housing starts?

    Because Scott there are 12M houses that should be RENTING for CHEAP – so cheap that people move out of their cousin’s house, and right now those houses are NOT RENTING. They are either empty or lived in by someone who “owns” the house, but is not making payments.

    Now, please re-read my above point, and stop changing the subject.

    PEOPLE doubling up is my point, not yours – the cause is NOT housing starts, the cause is that 12M houses already built are being kept from driving down rents.

    Please nod if you understand my point.

  11. Gravatar of Becky Hargrove Becky Hargrove
    18. July 2011 at 07:12

    Let’s try again, this laptop ate my comment in mid formation. I was musing about how scary it is for twenty-somethings who are expected to live in a world no longer truly possible for their budgets. It may be that the stage will shift to local communities who find that they have to create sustainable zoning options so that their own citizens are not forced to leave(for both business formation and living circumstances). Should such a dialogue occur, the light at the end of the tunnel may be the fact that entrepreneurs are finally brought back into the discussion about recreating wealth.

  12. Gravatar of joe joe
    18. July 2011 at 07:55

    no one can afford to live by themselves on the minimum wage.. maybe you can take a roommate but you damn sure aren’t going to be living by yourself.

  13. Gravatar of DanC DanC
    18. July 2011 at 08:02

    Don’t forget that you can still see regional variations. In real estate, location is often the key.

    I would argue that structural problems in many areas are driving the demographic problems.

    I cannot find a link but I remember in the 80’s that home builders were talking of a coming housing slowdown because of aging baby boomers (by 2020). Builders talked about slowing new home construction. Then the 90’s saw a big increase in demand (fueled in part by government programs and in part by new financial instruments.)

    So, to me, it looks like long term growth in housing was facing demographic factors in some markets, and generally, for some time.

    A bubble formed in the 90’s and nobody wants to catch a falling knife now.

    So while I think Scott has some valid points, I assume that we are just reverting to long term trends (demographic) and regional structural problems that are freezing many people in bad places.

  14. Gravatar of Greg Ransom Greg Ransom
    18. July 2011 at 08:32

    Many Americans saw rising wages during the 30s — matched by dramatic technological advance.

    Their welfare INCREASED during the Depression.

    The fallacy of too much aggregation creates a false story.

  15. Gravatar of Chris Koresko Chris Koresko
    18. July 2011 at 08:48

    How many households didn’t get formed because people couldn’t afford to buy homes at bubble prices? Even today, the price of a median house is well above its historical average, correct?

    Not many people want to settle down and raise kids in their parents’ basement.

  16. Gravatar of malavel malavel
    18. July 2011 at 09:31

    I found this wikipedia list interesting: http://en.wikipedia.org/wiki/List_of_minimum_wages_by_country

    The minimum wage is 33% of 2010 GDP per capita for USA. It’s lower than for most other developed countries.

  17. Gravatar of David Pearson David Pearson
    18. July 2011 at 09:32

    Martino’s article link shows us how different this situation is from the GD. Fisher speaks of the necessity to raise the price level so that, “businesses, industry and agriculture can be run again at enough of a profit to make sure that they are run at all and reabsorb the unemployed.”

    Imagine Fisher were brought back to life today, and after a strong coffee, were told the following:

    It is two years after a major financial crisis. Corporate profits to gdp are at peak levels; unlike normal recoveries, profits have captured the lion’s share of income growth from the trough. Real wages have been flat for the last ten years; they have declined steeply the past two. Inflation expectations are at normal levels. Commodity prices have had one of their best rallies in history, and many are near peak levels. The S&P500 trailing P/E is 15x (vs. 5.0 in 1930’s). Corporate real borrowing costs have never been lower. The price level is not quite back to its previous trend level, but it is reasonably close.

    He might say, “congratulations, I expect you have achieved a whopping decline in unemployment then!”

  18. Gravatar of DrJim DrJim
    18. July 2011 at 09:36

    “20-somethings who can’t get jobs are living with their parents.”

    “If they get a job it causes them to move into their own apartment, which leads to more housing starts (apartment construction.)”

    1) Unfortunately, some of them are now 30-somethings, and they bring their children. (daughter and grandson)

    2) Unfortunately, even some recent college graduates with degrees in supposedly high-demand subject areas (math) can’t get a job good enough to pay rent and support a family. (son)

  19. Gravatar of JimP JimP
    18. July 2011 at 09:43

    RA makes the argument again:


    For all the good it will do.

    The Republicans want deflation – they desire it. Deflation is their policy aim – and they will do their very best to get it.

  20. Gravatar of todd todd
    18. July 2011 at 09:47

    Morgan is a bit more vituperative than I would be, but I think he might have a point. Scott said that we worked off the excess long ago, but I’m not sure how he arrived at that conclusion. I think Morgan is asking the right question. How high is the current housing inventory? He says there are 12M homes that have already been built but that are being kept off the market for various reasons. I’m not sure where he’s getting that number (maybe he’s cited the source before), but accepting it for the sake of argument it seems pretty reasonable that this level of unsold/unmarketed homes would both depress demand by increasing the price of housing (owned & rented) & depress supply since if the level is known by industry participants they might reasonably assume that should prices begin to rise at all, their new offering could easily be undercut by the existing store. So Scott (or Morgan), how high is the inventory of unsold homes (source please)?

  21. Gravatar of Dave Schuler Dave Schuler
    18. July 2011 at 10:11

    There’s another sort of “demographic depression”. The Baby Boomers started turning 60 in 2006 and were better educated and had more disposable income at every stage of their lives than the cohorts that have succeeded them.

  22. Gravatar of Morgan Warstler Morgan Warstler
    18. July 2011 at 10:17

    todd I’m going to get you specifics, but generally mine is expansive:

    I’m talking about empty housing + underwater homes where the owner hasn’t been foreclosed on yet and is in arrears… this would generally include EVERYONE that Obama / DeKrugman claimed / wanted to would be help by forgiveness.

    This is past the 6M visible and so-called shadow inventory that you see from Case Shiller.

  23. Gravatar of GG GG
    18. July 2011 at 10:33

    Here’s how it “works”:

    1) Confuse people about the distinction between “wealth” and “income”””probably the worst single political economic crime possible to commit in public discourse and one of which the wealthiest man in the US, Warren Buffett, is guilty.

    2) Progressively tax income while claiming you are taxing the “wealthy”.

    3) Respond to all of the pathologies you create in this confusion by a proliferation of public sector “fixes” that eventually result in the public sector overtaking economic activities by “virtue” of its taxation of all economic activities.

    4) Allow the truly wealthy, whose property rights would disappear in an instant in the absence of government protections, to continue to accumulate net assets without limit and without paying the costs of protection of those property rights””shifting them onto the heavily taxed producers.

    5) Continue to increase the overall taxation of producers until the goose that laid the golden egg, the middle class, is dead.

    6) Decry the profligacy of the middle class as it ceases to have children hence family values, and goes into the abyss of usurious debt, the economy collapses due to a failure of consumer demand and the government centralizes even more power by handing over even more wealth to the creditors in exchange for equity stake.

  24. Gravatar of John John
    18. July 2011 at 11:45

    There’s another solution to the lack of demand for houses and aggregate demand in general that doesn’t involve stealing through the money system to raise NGDP. It involves letting prices fall. The real estate market has been propped up in numerous ways; it’s no wonder that people aren’t buying houses when they are being kept at overvalued levels. During a boom, entrepreneurs make mistakes and it’s up to prices to readjust production along sustainable lines. Trying to support certain products or industries, especially those that have been hardest hit is akin to sticking a metal pipe into the turning gears of the economy. Further, inflating the money supply is a form of theft that further distorts price signals and leads to economic instability.

  25. Gravatar of Tommy Unger Tommy Unger
    18. July 2011 at 12:23

    I really want to subscribe to GG’s newsletter. It virtually bridges what I thought was an insurmountable gap between Ayn Rand’s objectivism and socialism. And he/she does it in just a few short sentences. Well done, GG.

  26. Gravatar of FT Alphaville » Further further reading FT Alphaville » Further further reading
    18. July 2011 at 12:40

    […] A demographic […]

  27. Gravatar of John John
    18. July 2011 at 12:48

    Morgan’s been dead on right in this comment thread. Supply and demand is not working in the real estate market because TARP, QE, low interest rates, buying MBS and CDS, etc are preventing the market from clearing. If houses and rents reflected market demand, they would be cheap enough for people to afford and the demographic problems would disappear.

  28. Gravatar of The Anti-Gnostic The Anti-Gnostic
    18. July 2011 at 13:14

    So what do you think happens when economists and bureaucrats jiggle immigration policy to increase the labor supply and increase demand for decent housing?

    Any idea what sort of burdens that imposes for people in their prime childbearing years?

  29. Gravatar of Andy Harless Andy Harless
    18. July 2011 at 14:17

    If UI is raising the unemployment rate, and reducing UI lowers unemployment, then it will lead to economic growth.

    This does not follow. On the contrary, raising unemployment increases economic growth by increasing the pool from which employers have to choose. If you take away the incentive to search for a job, unemployed people will drop out of the labor force, and there will be a reduction in growth and a reduction in aggregate supply.

    And the few people who take jobs because they no longer receive UI benefits will likely be (1) those with more qualifications and experience and (2) those who desperately need a source of income because they already have their own household. With these people competing harder for jobs, the twentysomethings living with their parents will be less likely to find jobs and therefore less likely to move out.

  30. Gravatar of Abelard Lindsey Abelard Lindsey
    18. July 2011 at 14:21

    This is correct that, ultimately, demography drives housing prices. The outlook is even worse than what Jim Glass predicts. When Japan’s bubble ended in 1991, the job market for young people dried up for 10 years. The young people became “freiters” (German slang for slackers), stayed with their parents, worked temporary and contract jobs, and did the lonely planet travel thing in South East Asia. This is the future for the majority of young people in the U.S. A lot of them are going to say “what the hell” and decide that the set patterned life (marriage, house, kids, growing old) is not their cup of tea anyway and decide to live the bohemian, slacker life instead, just like Japanese young people since 1991. The U.S. fertility rate will drop from 1.9 down to around 1.2 or even 1.0 in the next 2-3 years as a result of these social changes. Even the hispanic fertility has significantly declined in the last 3 years. It will decline further.

    This is the future reality of the U.S. housing market. Get used to it!

  31. Gravatar of Brian J Brian J
    18. July 2011 at 14:38

    ” I know I’m going to sound like a broken record, but the biggest cause in low NGDP (although obviously other factors are also at work here-including immigration crackdown, minimum wage increase, extended unemployment insurance, etc.) ”

    Well, I’m not trying to be a smart alec, but I do wonder how the minimum wage and unemployment insurance are causing relatively big problems here. It’s not so obvious to a lay person such as myself, so I think it deserves explanation. So please, if you would, tell me why you think this.

  32. Gravatar of Morgan Warstler Morgan Warstler
    18. July 2011 at 16:57

    “but I do wonder how the minimum wage and unemployment insurance are causing relatively big problems here.”

    minimum wage means that many people don’t get to have jobs – they simply are not worth $7-8 per hour in the global market – it is impossible to profit off them.

    UI that lasts too long, lets people choose to not work.

  33. Gravatar of Scott Sumner Scott Sumner
    18. July 2011 at 17:12

    Morgan, Why don’t the owners of those houses rent them out?

    Becky, I agree, and I’d add that the kind of zoning that promotes affordable housing is no zoning (see Houston.)

    joe, Read my reply to Aaron. BTW, I used to live on the minimum wage when I was young.

    DanC, It’s normal for 20-somethings to live with their parents? No way I would have ever done that, and I made minimum wages.

    Greg, Yes, some were better off, but . . .

    Chris, You said;

    “How many households didn’t get formed because people couldn’t afford to buy homes at bubble prices? Even today, the price of a median house is well above its historical average, correct?”

    Then why were lots of new households being formed in 2006, when prices were sky high, and very few today, when prices are much lower?

    Malavel, A number of large European countries had no minimum wage at all until fairly recently, if I’m not mistaken. The European countries mostly have high natural rates of unemployment, especially among the young. This suggests minimum wages might discourage hiring of the young.

    David, The 1930s were much different, as the normal rate of inflation was close to zero. So wages were much more flexible. Indeed they fell in the early 1930s. Our wages are still rising. But I agree that Fisher would consider 2011 America to be very prosperous compared to the 1930s. He’d be blown away by the housing units, appliances, food and health care that America’s poor consume. We are much more picky today, and consider economic conditions to be a big problem, that wouldn’t have fazed people at all in the past.

    DrJim, Yes, It’s something we should be doing much more to solve.

    Thanks for the link JimP, Avent’s had some excellent posts.

    Todd, No one knows, as the government numbers include vacation homes, etc.

    Dave, You said;

    “The Baby Boomers started turning 60 in 2006 and were better educated and had more disposable income at every stage of their lives than the cohorts that have succeeded them.”

    Not in my field, young academics today have living standards far higher than when I was starting out around 1981–It’s not even close. But in fields like auto assembly I’d guess you are right. Overall, American living standards are higher than in the 1970s, when I was young. I once did a post on that. But I also agree with Tyler Cowen that the growth in living standards has slowed sharply after 1973, and especially in recent years.

    GG, I agree that we should stop taxing “income” and start taxing consumption/wealth (which are the same thing.)

    John, We tried deflation in the 1930s.

    John, How does QE prevent the market from clearing?

    Anti-Gnostic, I don’t understand your question.

    Andy, You said;

    “If you take away the incentive to search for a job, unemployed people will drop out of the labor force, and there will be a reduction in growth and a reduction in aggregate supply.”

    I don’t follow, UI reduces the incentive to job search. Taking it away increases job search.

    more to come . . .

  34. Gravatar of Jeff Jeff
    18. July 2011 at 17:34

    Household formation is not the only source of demand for new houses. There is also a replacement demand. There are roughly 130 million houses in the US today, and none of them will last forever. What percentage of the houses built more than 50 years ago are still standing? My guess is less than 10 percent. I’d guess that, in a steady state, replacement demand would be 2 percent or more of the existing stock of homes.

    Granted, we’re not in a steady state. But, if it weren’t for the current horrible state of the economy, which won’t last forever, I would expect that at least a million houses would need replacing every year.

  35. Gravatar of Scott Sumner Scott Sumner
    18. July 2011 at 17:35

    Abelard, I’m trying to push policies that would avoid that future.

    Brian, Read my responses to Aaron and Andy near the top.

  36. Gravatar of Scott Sumner Scott Sumner
    18. July 2011 at 17:37

    Jeff, You said;

    “What percentage of the houses built more than 50 years ago are still standing? My guess is less than 10 percent.”

    This would surprise me. I live in a town of 83,000 people, a large share of which live in roughly 100 year old houses. Modern houses are built to last 100 years easily.

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  38. Gravatar of Jeff Jeff
    18. July 2011 at 18:30

    Survivor bias. You see only the 100 year old houses that are still in use, but not the ones that were torn down, fell apart, or were otherwise replaced. And while it may be that some old houses could last 100 years in a small town, many of us live in communities where those old houses have rooms that are too small, no insulation, poor HVAC design, and big yards that cry out to be subdivided. Not to mention they’re missing the all-important granite countertops. (just kidding on that last one)

  39. Gravatar of Brian J Brian J
    18. July 2011 at 20:15


    It wouldn’t surprise me if it had some effect, but just how big of an effect?

    Also, are you against the minimum wage in general?

  40. Gravatar of Jim Glass Jim Glass
    18. July 2011 at 20:22

    Scott: Thanks for metioning my comment kindly.

    Usually when I’m quoted in Internet discussions it is with vitriol, mocking and slurs.

    But I have a different take on the household numbers — not as a demographic depression but as the second leg of a demographic *bubble*-and-bust in household creation. One even *bigger* than the boom and bust in the home bulding market.

    In fact the numbers look like the home building boom-and-bust *followed* the household creation bubble-and-bust, and was maybe driven by it(?).

    I haven’t seen anyone anywhere mention this idea, but if it is true there may be something in it to consider. Lots of people have analyzed all kinds of reasons for the housing bubble — but what would cause a “household creation bubble”? I haven’t seen anyone anywhere even mention the existence of the huge boom in household creation.

    Here’s how big the household creation bubble was: for all of the huge collapse in household creation numbers, it is not at all clear to me that the number of households is yet down even to the long-term trend line. The number of households may still yet be above trend.

    I’ve disinterred my old blog for a moment to post some charts illustrating the point, as seeing is simpler than
    trying to understand what I write.


  41. Gravatar of David Pearson David Pearson
    18. July 2011 at 21:46


    I think you missed my point. The sticky wage model holds that reducing real wages will lead to higher employment. The thing is, firms don’t make employment decisions based on “real wages”. They base them on the difference between revenues and wage costs. The real intent of raising the price level, as Fisher suggests, is to raise firms’ prices more than their wages. Higher margins thus supposedly lead to more employment.

    Fisher would thus be shocked at how a cyclical peak in corporate margins/profits can coexist with such high unemployment. Measured using the same classifications as the ’30’s this unemployment rate is as high as 16-18%.

    BTW, those peak margins are not a function of multinational’s overseas profits: the NIPA accounts are able to isolate domestic profits.

  42. Gravatar of Lorenzo from Oz Lorenzo from Oz
    18. July 2011 at 22:55

    If you want demographic depression, try Japan.

  43. Gravatar of Peter Peter
    18. July 2011 at 23:15

    Surely the simple reason that the minimum wage and UI reduce wealth is that people on the dole aren’t producing?

    I work in the property industry and my experience through 4 property recessions is that one of the reasons demand takes a while to restart is the long time it takes for new values to be established. You see a lot of guessing about values as the recession bites and that has a big impact on housing finance. The lack of starts and sales feeds the problem so property tends to have a long bottom.

    I can easily see how an AD shock causes a problem in property but I don’t see how inflation can quickly solve that problem. I can see how inflation helps turn around the market in the long run.

    Here in Oz we’ve also had a long reduction in home starts and still have a growing population (though not quite as fast), but interest rates are relatively high and the property market continues to languish. The pent up demand has been hailed as the saviour for some time, but not much sign of it yet. Prices for homes are trending down more than up.

  44. Gravatar of Tuesday 7atSeven: demographic depression | Abnormal Returns Tuesday 7atSeven: demographic depression | Abnormal Returns
    19. July 2011 at 02:47

    […] The US economy is facing a “demographic depression.”  (The Money Illusion) […]

  45. Gravatar of apinvestor apinvestor
    19. July 2011 at 03:53

    Scott, “Modern houses are built to last 100 years easily” is definitely not true in all neighborhoods. Top end, yeah, pretty good stuff.

    Lower end, though, I see substandard workmanship, materials and design. Cheap boxes with bells and whistles, pushed like glitzy tennis shoes. Money has to go into screwed local code reqs.
    Tnx for the stimulating topic.

  46. Gravatar of Morgan Warstler Morgan Warstler
    19. July 2011 at 06:16

    “Morgan, Why don’t the owners of those houses rent them out?”

    Soctt, do you really not know this?

    1. Banks have all considered it – the issue is that the KIND OF COMPANY they’d have to become dramatically alters their market value.

    2. They aren’t being forced to do it.

    You’re talking about what is called “management intensive” real estate investing – being a landlord, that means fixing toilets, walls, foundations, all the things that a bank WOULD NEVER do, their investors WOULD NEVER think they are good at… and they are not being forced into it.


    Ok, so now that you have the answer to your question, are you ready to adopt my position?

  47. Gravatar of Russ Anderson Russ Anderson
    19. July 2011 at 06:17

    “20-somethings who can’t get jobs are living with their parents.”

    And many college graduates that do find jobs have student loans that are the equivalent of a house payment. ~30 years ago college graduates would have student loan debt burdens about the size of a car loan. Now they come out with debt the size of a house loan. It is a significant problem that is only getting worse.

  48. Gravatar of Scott Sumner Scott Sumner
    19. July 2011 at 08:18

    Jeff, I know someone in a average Tucson home (less than $200,000) which is about 20 year sold. It looks brand new, and looks to me like the home would easily last 100 years. What am I missing? And this seems like the typical home now being built in the sunbelt.

    I’m not saying you are wrong, as many Americans underestimate how important the mobile home sector is, or that as recently as 50 years ago many rural southerners lived in shacks.

    Brian, Yes, I’m pretty much against all wage and price controls, except clear-cut monopolies. The EITC is far superior to the minimum wage.

    Jim Glass, I like that post a lot, and linked to it in my new post.

    David, You are confusing average and marginal considerations. Companies hire until the marginal benefit of an extra worker no longer exceeds the marginal cost. The average level of profits is not a consideration. Yes, it’s surprising that profits are so high right now, but that has no bearing on the sticky wage theory, as you are looking at average profits, not marginal profits.

    Lorenzo, Good point about Japan.

    Peter; You said;

    “Surely the simple reason that the minimum wage and UI reduce wealth is that people on the dole aren’t producing?”


    Regarding Australia, prices are still extremely high compared to 10 years ago–nothing like the US. Even if prices fell 20% tomorrow, the bubble theorists of 2005 would have been completely wrong.

    apinvestor, See my reply to Jeff.

    Morgan, Why don’t banks lease houses to real estate companies that specialize in renting them out and fixing toilets?

    Russ, That’s part of the problem, but by no means all.

  49. Gravatar of David Pearson David Pearson
    19. July 2011 at 08:50

    Using a ceteris paribus assumption, the marginal profit to hiring a new worker has increased at the fastest rate in this recovery than any previous post-war one. That is, corporate profits have increased at the fastest rate, again, gaining the lions share of the recovery in income. The sticky wage model postulates that increasing the spread of prices over wages — margins — will result in a higher marginal benefit to hiring. This has not been the case. My question is, how will increasing this spread yet further raise employment?

  50. Gravatar of Russ Anderson Russ Anderson
    19. July 2011 at 13:46

    “1. Banks have all considered it – the issue is that the KIND OF COMPANY they’d have to become dramatically alters their market value.”

    Worse than that, banks would have to significantly write down assets (home value) on their books. Doing nothing allows them to pretend that the homes are still worth the mortgage amount. Doing something (sell, rent) forces them to write down the value of the asset which would be a huge hit, possibly making them insolvent. If 12M homes were sold for 20-25% of their last sale value, how many mortgage holding companies would still be solvent?

    There’s also the logistical issue of documenting actual ownership for foreclosure. Apparently maintaining the paperwork as mortgages were bundled & sold has turned out to be problematic, to the point of mortgage companies engaging in forging mortgage documents. Banks could be slow to foreclose because they simply cannot prove ownership.

    Of course foreclosing on all the delinquent payers would dump even more homes on an already saturated market forcing prices lower and more mortgages underwater.

    Meanwhile each home in which the non-paying resident stays is one more home the mortgage holder does not have to pay to maintain. Unoccupied homes can deteriorate quickly (especially unheated homes in cold climates) while maintaining them burns cash. Allowing “free” rent is not something a mortgage holder would normally want to do, but these are not normal times.

  51. Gravatar of Brian J Brian J
    19. July 2011 at 14:23


    I kind of figured that. Which is fine, of course. But the reason I keep harping on just how much of an effect it is having is that there seems to be some confusion when commentators bring it up. Even liberals like Brad DeLong have said it has some effect at the very bottom of the job market, but he, and other supporters like him, seem to argue that the effect just isn’t that big and that it is overwhelmed by other factors.

    We’ve clearly had a significant amount of job loss over the last few years and/or very little job creation, but just how much of that is due to the minimum wage increasing? Ten percent? Twenty percent? Would we have a significantly larger number of jobs if the minimum wage hadn’t been increased? When the minimum wage decreased in value for a long, long time, why wasn’t there any significant acceleration of job creation?

    I’m all for the E.I.T.C., by the way. But, feel free to call me naive or dumb or any number of things, this Brad DeLong post, where he talks about balancing things on the margin, makes a lot of sense.


  52. Gravatar of Jeff Jeff
    19. July 2011 at 16:30


    About ten years ago I visited the neighborhood where I grew up in Lombard, about 20 miles due west of Chicago. Our old house was then about 50 years old, and many of the other houses in the neighborhood were built around the same time. I was struck by how small they seemed, even with the additions that had been added to about half of them. Many of the old houses had been torn down and replaced by large newer homes.

    What we think of as an acceptable house changes as incomes rise. Our house had no air conditioning or dishwasher, the washer and dryer were in the kitchen, and the wiring in the rest of the house would be considered inadequate today. And we were crowded.

    I had eight siblings. My parents room barely held two dressers and a queen size bed. Five sister shared a room that squeezed in two double beds and a single, with less than a foot of room between them. My three brothers and I had two sets of bunk beds and two small dressers stuffed into the third bedroom. Eleven of us lived in less than 1400 square feet. We weren’t impoverished, we were probably just a bit below median family income.

    Almost no one in the US lives like that today. Average and median house sizes have been increasing for years. Amenities we didn’t have, like central air, built-in dishwashers, laundry rooms, high ceilings, fireplaces, etc., are standard today. You couldn’t sell my old house today without extensive remodeling and a large addition or two. Many don’t bother. About half of the houses in my old neighborhood have been torn down and replaced by bigger new houses.

    My current house was built in 1974, and like most houses built before the 1973 oil embargo really sunk in, it is woefully under-insulated. My neighbor spent 50 grand to replace all his windows and get new insulated siding nailed over his old siding. His house is the same model as mine. When I bought in 1997, the insurance company estimated that it would cost about $120k to rebuild the house if it burned down. So my neighbor’s updates cost almost half the value of the house. That’s like building half of a new house.

    What are you missing? It’s not that new houses can’t last 100 years. It’s that nobody will want many of today’s houses 50 years from now.

    Oh, and to back up what apinvestor says about low quality construction, I can show you at least a few big townhouse developments near hear that deserve the appellation “instant slum”.

  53. Gravatar of Searching for Parents in the Housing Market | Loan Finder Searching for Parents in the Housing Market | Loan Finder
    19. July 2011 at 17:10

    […] Growth of households was strong in the early 2000s, but then dropped at the end of the decade, driven by several factors, including young people living at home longer and delaying the delightful diaper-changing […]

  54. Gravatar of Scott Sumner Scott Sumner
    20. July 2011 at 08:42

    David, You said;

    “Using a ceteris paribus assumption, the marginal profit to hiring a new worker has increased at the fastest rate in this recovery than any previous post-war one.”

    Again, you are confusing marginal and average profit. Yes, the average profit is surprisingly high, but the marginal profit is near zero.

    Russ, I don’t know much about our accounting system, but there is something seriously wrong if an unoccupied home need not be written down, but a leased home must be written down. Sounds like accounting reform is the solution.

    Brian, I think the minimum wage explains 10% of our unemployment, at most (probably less.)

    I don’t understand DeLong’s argument. If we have an EITC, then the costs (which I agree are very real) are already sunk. But the minimum wage denies people jobs, meaning they also don’t qualify for the EITC. And it’s now much harder to get welfare–so they’re basically screwed.

    I also think the EITC should be done through the payroll tax, which would be much cheaper. Then we could also abolish welfare, and use the money to beef up enforcement of the EITC, to try to reduce fraud. This country desperately needs a labor MARKET, which we don’t have. That’s one area I agree with Morgan.

    And you are anything but naive or dumb, your question was excellent.

    Jeff, Yes, I am old enough to remember that era as well. I wonder about younger economists who think real wages haven’t changed since 1973–they probably have no idea what homes were like back in the 1960s.

    Maybe you are right about depreciation–I’ll keep my mind open.

  55. Gravatar of CharlieK CharlieK
    20. July 2011 at 09:22

    I haven’t read all the comments but there certainly is a few different opinions here. I’ll chime in and say that the biggest issue here is jobs. And a few often unappreciated items impact jobs more than most think.
    I have spoken on how new home construction is the largest employer in the country after government and education. Go to most any city and in years past more people were involved building homes than were building anything else. Shovel ready civil jobs for bridges, highways & tunnels can’t compare to the # of people in housing.
    The housing collapse is largely a result of people out of work. Certainly their budgets became strapped as costs went up and wages didn’t. But much of the foreclosure mess and delinquent payment mess is due to people running out of a monthly income.
    And as those homes were “dumped” on the market it brought down the true value of everything else. The more big banks “dump” the more everything becomes worth less.
    Its a cycle and it is killing our country. If we could have started building new homes two years ago people would have been back to work and spending. Housing is our country’s GNP as the number is huge.
    One might answer that we have more vacant homes than ever before. We do but a national effort to turn over those old homes into smart affordable energy eficient homes could turn over our housing stock and change how we consume energy.
    Everyone’s ga-ga over puttin some solar cells on the roof of an average sized home. That effort employs 2-3 people for a day or two where half the total cost of $10-35k gets sent back to China or Japan (just like what we do withoil & the mideast). Conversely a new home can be built to be affordable (half the price of the norm) and super efficient and that home construction effort can ultimately employ 25 americans counting the construction labor and materials manufacturing. Better yet if done right 90+ % of the spending is on American goods.
    Now that applied up until recently because the new mortgage regulations are going to KILL the housing industry. A 20% downpayment and a stellar credit score will do to the for sale housing business exactly what luxury taxes did to the yacht business a few decades ago.
    Sorry to say that our governments failure to address the very business that keeps people employed and products moving will ost likely set us all back 50 years.
    Get your cash and find a cheap island.

  56. Gravatar of Checking in on the coming boom – Economics – Checking in on the coming boom - Economics -
    20. July 2011 at 10:43

    […] and then build. Pressure for a boom may therefore be building.But Scott Sumner provides a note of caution: household formation has also fallen dramatically in recent years. He attributes this drop, in […]

  57. Gravatar of Peter Peter
    20. July 2011 at 13:45

    For everybody crying about high rents, I would love to see some numbers backing it up. In my limited view of the world, I am renting my house (to avoid foreclosure as I couldn’t sell and have pride in myself, i.e. not going to walk away just because it makes economic sense) at 80% of my current mortgage and the house I am living in now (I have a good relationship with the landlord and was curious) is renting at 90% of his current mortgage. Sure you could argue that rent is above market average but that is simply because folk are trying to minimize the loss on their underwater properties.

  58. Gravatar of Scott Sumner Scott Sumner
    21. July 2011 at 07:21

    CharlieK, You said;

    “The housing collapse is largely a result of people out of work.”

    The causation runs both ways. But this is a very important point, which many people overlook.

  59. Gravatar of Brad Hunter Brad Hunter
    22. July 2011 at 08:52

    Jim, in your Scrivener blog link, you wonder why the boom in household formations occurred. It was the advent of exotic mortgages! As of 2002/03, you could borrow 100%, pay interest only (or even less, with pick-a-pay negative amortization loans), so people who were completely unqualified to buy a home were suddenly encouraged to move out from Mom’s house and buy a house.

    Scott, you correctly stated that “nobody knows” the actual count of excess vacant homes because the Census Bureau includes vacation homes. I have two different solutions in mind. Using the new decennial census data, you can just subtract “seasonal/occasional” from the total “vacant” number. Granted, not all areas of the country are released yet, but most are, and you can sum those that are and extrapolate the remainder. The issue here, though, is that most of the empty homes you end up with are “frictional vacancies”, meaning homes that are vacant because of normal flows (just like frictional unemployment, which you or somebody in this thread observed). So the key is: how many “excess” vacant units are there. I come up with 10,202,700 total vacant units through the extrapolation, and then figure that, based on comparisons with prior decade censuses (taken during non-bubble/bust times), the “excess” vacancy is somewhere between 1.3MM and 1.6MM. I’ll be able to refine that number more precisely once more complete data are released from the 2010 census.
    To my thinking, this number is more of a gauge of the future demand for new homes than the 12MM that are distressed, because not all 12MM will end up as excess empty supply.

  60. Gravatar of Scott Sumner Scott Sumner
    22. July 2011 at 12:41

    Brad, That’s very helpful, and it suggests the numbers my opponents are throwing around are nonsense. With more demand, we could be building new houses.

  61. Gravatar of Top clicks this week on Abnormal Returns | Abnormal Returns Top clicks this week on Abnormal Returns | Abnormal Returns
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    […] The US economy is facing a “demographic depression.”  (The Money Illusion) […]

  62. Gravatar of FT Alphaville » Demographics and destiny, US housing edition FT Alphaville » Demographics and destiny, US housing edition
    26. July 2011 at 13:08

    […] demographic pressures for more housing construction. And if you really want to pile on, check out Scott Sumner’s recent post on why previous household formation trends won’t return anytime […]

  63. Gravatar of 5 Ways Americans Are Surviving the Great Recession | Truth Is Scary 5 Ways Americans Are Surviving the Great Recession | Truth Is Scary
    26. July 2011 at 14:01

    […] 40 years. That’s according to economist Scott Sumner, who, citing an analysis of Census data, notes that in 2007 over 1.6 new households were formed, which was more or less in line with the average […]

  64. Gravatar of Andy Harless Andy Harless
    7. August 2011 at 06:27


    UI reduces the incentive to job search.

    If you’re paying people to be unemployed, you’re paying them to search for a job. (If you’re not searching, you’re not unemployed; you’re out of the labor force, and if the UI people find out, they will drop you.) Usually paying people to do something increases the incentive to do it.

  65. Gravatar of ssumner ssumner
    12. August 2011 at 09:27

    Andy, I’ve known people on UI, and my impression is that that rule is ignored. I do agree that people look for jobs, it’s just that they are pickier about what they’ll accept.

  66. Gravatar of sage2123 sage2123
    28. November 2011 at 04:16

    Speaking of demographics, here’s an interesting one that is tied directly into housing.

    Over the last 50 years the average home size (sq. footage) has doubled, while the average family size has decreased by 50%.

    So, effectively, we now have half as many people living in twice the space we did 50 years ago.

    Any wonder why we are now witnessing negative household formation?

    Add in some doses of unemployment, stagnant wages, and inflation, and the pace picks up.

  67. Gravatar of Scott Sumner Scott Sumner
    28. November 2011 at 17:43

    sage2123, Good point.

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