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Our Borrowers are Retiring


Theo Spark posts about the U.S. housing market:

There are 140 million personal residences in the United States today.

  • Zillow says 20 million owners 'plan' to sell their homes if there is any improvement in price.

  • Four million existing homes are currently on the market.

  • Lennar, Pulte, et al have one million new homes for sale.

  • There are one million bank-owned properties.

  • Eight million mortgages are late on their payments.

Not very good numbers.

Now consider that the 80 million baby boomers are retiring at a rate of 10,000 per day, many wanting or needing to downsize residences as they age.

Assuming they are downsizing from a 2,500 square foot home to a 1,000 square foot condo, and/or a 100 square foot assisted-living facility, that is a shrinking of demand of 4.3 billion square feet per year. [Figure roughly the size of San Francisco each year.]

Residential property in normal cities (not S.F. or N.Y.) goes for $150–$200 per square foot. New construction and luxury features can push the cost above $200/ft2.

Say 4 billion feet and $150 per; that’s an excess value of $600B per year in U.S. real estate. The laws of economics say that there is no enduring excess value. The price of existing stock will drop until it gets cheap enough that all the stock is bought.

The value of U.S. housing stock must fall by $600 billion a year. A 2008 estimate put the total value of all housing at $18,700 billion (almost nineteen trillion). A little math reveals that the value of U.S. housing wealth will decline by 3% per year.

Due to the wealth effect, a decline in home value tends to reduce spending and economic production. Also, lower values support less borrowing. Since debt is how nearly all money is created these days, less borrowing means less money flowing around.

Reduced economic activity is the definition of recession or depression. Less money flowing—which leads to lower prices—is deflation.

Those 2,500 ft2 houses were built with borrowed money. Borrowed money inflated the cost and price up to $200/ft.

Our borrowers are retiring. And their debts will be paid. The questions are only “when?” and “by whom?”