Sunday, October 28, 2018

What Is The Future of New Housing and More Generally US Real Estate?


  • New Housing is being Created at an Unprecedented 2.5x's the pace of the Growth of the 15 to 64yr/old Population
  • Total Annual Population Growth Has Slowed 25% from Peak Growth, 2 Decades Ago
  • However, Annual Population Growth Among 15 to 64yr/olds Has Slowed Over 80% From Peak Growth & Will Continue Decelerating Through 2030
  • 15 to 64yr/olds Do Nearly all the Net Home Buying, 65+yr/olds Net Home Selling
    • 15 to 64yr/olds Have a 70% Labor Force Participation Rate vs. 27% for 65-74yr/olds, just 8% for 75+yr/olds
    • 15 to 64yr/olds Earn and Spend Double that of 65-74yr/olds & triple that of 75+yr/olds
    • 65+yr/olds Have Highest Homeownership Rate at 78% vs. Just 36% for Group with Lowest Rate, 15 to 34yr/olds
    • 15-64yr/olds are Credit Willing Relative to Credit Averse 65+yr/olds
I read an article a few days ago that got me thinking.  The articles author claimed, "At 5% mortgage rates and with today's level of affordability, history shows that there is nothing in the way from having a homebuilding boom over the next ten years to satisfy this demographic demand."  Link HERE.  I found the claim contrary to everything I think I know, so I thought I'd lay out the counter argument.

The chart below shows annual growth of the 15+yr/old US population (blue columns) vs. the annual growth of the 15 to 64yr/old population (red balls).  The 15+yr/old annual population growth has fallen 25% (decline of a half million annually) since the 1998 peak but more significantly, the 15 to 64yr/old annual population growth has fallen over 80% (decline of 1.8 million/yr) due to a combination of lower immigration rates and lower birth rates.

These population growth trends will only continue to slow through 2030, according to UN and Census estimates (not really estimates, since this population is already born and simply advancing into adulthood).  The future estimates for 15 to 64yr/old population growth (presented above) include estimated immigration well above present rates.  Most, if not all (net) of the assumed 15 to 64yr/old minimal population growth is premised on ongoing immigration that continues slowing.  Thus the forward looking 15 to 64yr/old growth estimates are likely to be lower and perhaps even turning to outright annual declines.

The chart below shows average income, spending, and LFP (labor force participation) rates by age segment.  No shocker, those actively working make and spend more than those with low rates of employment.  Those who have worked longer earn more than those new to the labor force.  Elderly expenditures come into very close alignment with their (generally) fixed incomes.

Noteworthy is that 75+yr/olds have only an 8% LFP rate but will make up over half of the total 65+yr/old population growth through 2030.  The next largest growth segment is among 70 to 74yr/olds with a 19% LFP rate, and the smallest increase is among the 65 to 69yr/olds with a 32% LFP.   As an aside, 65+ year olds have the highest homeownership rates at 78% vs. 36% for those aged 15 to 34. So while the more affluent portion (5% to 20%?) of 65+yr/olds may be interested in a second home in the dessert, the mountains, or beach...the majority already own and are eventually looking to downsize.  Simply stated, nearly all the coming growth is among those that work the least, earn the least, spend the least, already own homes, and are more likely to downsize than buy a second home.

Putting it all together (chart below), annual 15+yr/old total population growth (blue columns), 15 to 64yr/old population growth (red line), housing starts (yellow line), and federal funds rate (black line).  Given it is the 15 to 64yr/old population that does the net home buying, (and growth among them continues decelerating...coupled with rising rates and elevated valuations versus most population growth among 75+yr/olds who are more likely to sell via downsizing and/or willing properties to their heirs) I contend the US is creating too many homes presently, not too few.  Of course, this doesn't even factor in things like the lack of income growth among the vast majority those working, high student debt loads, slowing household formation, continued delayed family formation and the lowest birth rates in US history which were just recorded in the first quarter of 2018 (according to CDC...HERE), etc. etc.
Contrary to the author of the article that inspired me, I contend that housing is in for another very rough decade (at the very least)...likely worse than the period during the GFC.  The math is pretty straightforward on this one.

Thursday, October 18, 2018

Why China Can't Compromise on a Trade Deal

Debt is money spent in the present and an obligation to be repaid in the future.  Given this, I thought I'd contrast China's population of young versus their obligation to be repaid in the future.

The chart below shows the 0 to 24 year old Chinese population (green line) versus Chinese debt (red line) and GDP (black line).  The 0 to 24 year old Chinese population swelled by over 300 million from 1950 to it's ultimate peak in 1991.  Since that peak, the total population of young in China has fallen by 176 million, or a 30% decline in the number of children across China.  Moving forward, the UN medium estimate hopes the formal elimination of the one child policy will simply slow the rate of decline in the population...but by no means will China's fast declining childbearing population (those aged 15-44) nor disproportionately young male population potentially be offset by a slightly less negative birth rate.  Contrast that with the quantity of debt being forcibly injected into a nation that faces a massive imminent population decline.

To put that debt into perspective, the chart below shows that total debt and annual GDP each divided by the 0 to 24 year old Chinese population.  As of 2018, every child and young adult in China under the age of 25 is presently responsible for over $100 thousand dollars in debt while the annual economic activity (GDP) created by all this debt continues to lag ever faster.  And the coming decade only worsens as the young population continues its unabated fall and debt creation (absent concomitant economic growth) continues soaring...building more capacity all for a population that is set to collapse?!?
China's predicament and reaction to it are not particularly unique...but given China's size, the ultimate global impact of China's slow motion train wreck will be unprecedented...particularly as their 15 to 64 year old population is now in indefinite decline.  Chart below shows annual change in Chinese 15 to 64 year old population, in both millions (green columns) and percentage (blue line).
Massive overcapacity (thanks to over a decade of government mandated mal-investment) versus a ever swifter declining base of consumption does not add up to a burgeoning middle class or a happy ending.  Simply put, GDP growth (black columns, below) follows the working age population growth (blue line, below) and only through massive debt has China been able to maintain inorganically high growth rates.
But the population that does all the work and most of the consuming is in secular decline versus a ramping population of elderly.  Chart below shows working age population (green line) peaked in 2011 will be falling for decades versus 60+ year old Chinese population (mandatory retirement in China is 55 for women and 60 years old for men).
Of course, this same situation was seen in Japan and Germany well before it presented itself in China, but the global import market was still growing fast enough to support Japanese and German domestic depopulation through higher exports.  Unfortunately for China (and India and most other nations hoping to export their way to prosperity), that option has now expired as the chart below details the same dynamic of declining working age populations and surging elderly among the major importers of the world.