Reply #14: Demographics, housing and construction statistics. [View All]

Back in 1970 there were about 25 million families in America with 2 parents and 2 or more children. That is to say, the kinds of folks who need and can afford a home with three or more bedrooms. There were, in 1970 about 35 million housing units in America with three or more bedrooms. Roughly speaking, supply and demand were more or less in balance.

Fast forward to today. There are still about 25 million families with two parents and 2 or more children …. the kinds of folks who need and can afford a home with three or more bedrooms. But there are over 70 million housing units with three or more bedrooms.

Through a combination of government policies via tax incentives, deductions, subsidized interest rates via Fannie & Freddie “guarantees” and easy money, America has seriously, disastrously overinvested in housing over the past 50 years. Every time there was an economic slowdown, government goosed the housing market. But housing is not an earning asset. Once it is produced … it adds no additional productive capacity. Every dollar misallocated to housing was a dollar not invested in infrastructure, factories, technology etc.

Arguments about subprime loans and derivatives and banksters shananigans are fascinating … but ultimately miss the point. America has had a housing bubble 50 years in the making and it was going to burst whether there were subprime loans and derivatives or not. Witness Ireland and Spain. Massive housing bubbles and busts and nary a derivative or structured product to be found.

Unfortunately for those in the construction industry, I think it will be a long while before the excesses are cleared from the system and new construction has anything that looks like growth.

But, ultimately that will be a good thing as investment will find it’s way into more productive assets. Unless, of course, America decides to reinflate the housing bubble in which case we will have ourselves another bust.