COTW: End of the Dream

One of the axioms of personal investing is that a home is the biggest investment most working people will make in a lifetime. That investment has been a good one since home prices have risen since the 'Great Recession'.  Demand created by a demographic bulge--the baby boomers--has provided a steady upward impetus.  But that is coming to an end as boomers reach old age and less consumption.  Many of them are "downsizing" once their families are out of the nest.  It is no secret that Millennials are not buying homes as early or to the same degree that their parents and grandparents did.

What has happened to the Japanese home market, may be significant for the US market going forward.  The Japanese have experienced falling home prices for twenty-seven years as the population becomes older.  Their market bubble began around 1979, peaking in 1991 at age 42:

The reason is fairly simple: people nearer to death are sellers, not buyers, and since real estate is imperishable (tell that to residents of Redding, CA) the impact of the end of life is more significant.  When Millennials began buying real estate, it was not enough to offset the downward trend.  If an adjustment is made for this effect--subtracting "dyers" at age 84 from buyers at age 42, the chart looks like this:

In this analysis, the real estate market in Japan does not bottom out until 2033, or forty-two years from the bubble peak of falling real estate prices!  Japan is not the US, obviously.  But the same demographics are at work here and Harry Dent, who produced these cautionary charts, says the US down leg from the last bubble top in 2006 will last thirty-three years.  The US market has a double peak, with the second upswing (current) eclipsing the first.  The trend is predicted to turn negative around 2020, collapsing 40-50%:

Since 2007, ownership has dropped by 3.6 million and renters have gone up by 1.9 million.  The reasons include tighter lending standards, low supply of affordable homes, along with soaring valuations.  Homes are 75% more expensive than rental units, and much more so given flat incomes.  US demographics are not as unfavorable as Japan's, but when the same adjustment is made subtracting "dyers"-- at age 76 in the US--from buyers at age 42--more of those than in Japan--the chart still looks distressing.   Prices do not take a swan dive until 2025 when the greatest number of boomers die, so you still have time to take your equity and run.