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Demographic Depression

May 5th, 2009

For almost ten years now if you find yourself sitting next to me at a social function, and make some passing comment about being able to afford a cottage when you retire, or what with the prices of houses what kind of house will your kids be able to buy? you would quickly discover I have a theory. It’s not an optimistic theory, it’s not a pleasant thought, but, I lost nothing when the stock market declined last year because I had an idea what was coming (although, it came three years earlier than expected).

The theory? As Mark Steyn says, “lets start with demographics, because everything does.” I argue that the greatest amount of wealth is getting set to retire, that is, the possessors of that wealth will retire.  Which means that instead of investing in stock markets, they will invest in bonds. When wealth leaves the stock market, the market contracts. Contract fast enough and it will crash. Forensic economists will sort through the rubble, but don’t be surprised if that’s partly what happened last year. Furthermore, housing prices will drop, says the theory, as these people get out of all those homes built from the 60’s to now, and move to condos, apartments and those retirement cottages. The single family home: who wants one? and those that do will find two on the market for every buyer.  Especially true of those mammoth McMansions that have predominately been built the last twenty years.

It is with some trepidation that I note, the experts (who always seem to be wrong) are starting to catch up to me. Bloomberg today has an article on just such a demographic depression, and quotes Harry Dent, author of The Great Depression Ahead:

What you can’t see in the most recent housing numbers is the least-visible driver of home prices today: demographics.

Baby Boomers

The baby-boomer generation, the largest in American history, will be buying fewer single-family homes.

The U.S. is experiencing a 40-year generational peak in consumer spending, one that will lead to “the first and last Depression of our lifetimes,” author Harry Dent predicts in his book “The Great Depression Ahead” (Free Press, 2008).

Although we may not be headed for a 1930s-style Depression, there’s plenty of evidence to suggest that boomers are dumping their four- and five-bedroom suburban homes for two- and three- bedroom condominiums.

It’s also unlikely that the “Generation X,” born between 1965 and 1976 (or more derisively called “baby busters”), will bid up home prices. They are only 44 million strong, not as wealthy and even more in debt from college loans.

The baby boomers are reorganizing their finances after a rocky decade in stocks. They aren’t buying as many second homes and vacation properties in warmer climates.

I was further surprised to read a press release for Dent’s book, in which he predicts a decline almost exactly as I have through the years:

Harry Dent forecast the housing slowdown years before it occurred and sees the minor recession of 2008 as
the beginning of a greater stock crash and depression to unfold between 2009 and 2012, with the worst crash
for stocks and housing likely between late 2009 and mid 2011. Home prices will continue to decline into late
2008 and then will likely experience a minor rebound in early to mid 2009. However, rising inflation, interest
rates and a last commodity bubble will bring a final blow to stocks, the economy, housing, and even the greater
emerging market bubble in stocks overseas.

A time frame of 2009-2012, when those boomers start retiring en masse, is exactly what I have been saying. Houses will be sold to pay for retirement, and money that was in stocks will be taken out to safer environs. The followup generations, including mine, have no capacity to fill the void. A decline in stock and housing prices must occur under those circumstances.

I’m not hiding in a bunker, scared of the future, in fact I’m quite optimistic. But a sense of this is what I have been saying has pervaded my reading of much of the economic news the past six or nine months. No need to panic, but be aware, there is likely more bad coming down the pike in the next three years.

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