The Three Horse Economy – Week 4

Horse #3 – Demographic Trends:

A member of the Boomer generation and a student of demographics, I am aware of the fact that we Boomers have distorted the American economy our entire lives. At our peak there were around 80M of us, but because life is a fatal experience, today there are approximately 75M Boomers.

The generation immediately after us, called Generation X, is about 25% smaller than the Boomers. Their size is approximately 60M. But their smaller size is beginning to have a huge impact on the residential market.

Today most of Gen X owns a home and they have a mortgage rate that is probably in the 3% to 3.5% range. There is little incentive for them to move up, both in purchase price and higher interest rates, which would increase their mortgage payments.

The generation following Gen X is Gen Y which is 10% larger than the Boomers and about 50% larger than Gen X. Most demographers would say that they are between the ages of 19 and 38. This group was hammered by the Great Recession, had a very difficult time finding full-time employment, and were unable to purchase cars and homes. Therefore, they created what is called the “sharing economy” (think Uber, AirBnB, etc.).

Most of Gen Y have not bought homes but rather rented in urban environments where they could walk to work and enjoy an active social life. Today they are beginning to marry and raise families. There are some indications that as they marry, they will move to the suburbs and buy homes.

Unfortunately, land use ordinances, subdivision ordinances, cost of construction, combine to make the production of first homes suitable for Gen Y extremely difficult. Demand greater than supply means prices increase so the market can ration the available homes.

It is critical to remember that land is the source of all wealth. Every product that we humans consume originates with land. Not all tracts of land are equal in quality and portfolio management requires every investor to hold some cash for liquidity. But historically, long term the best investment is land.