Thoughts on “Age, Housing Demand and Real House Prices), Regional Science and Urban Economics, Vol. 26 (1996): 465-480.”

It is fun to read old academic articles relating to housing. At least I enjoy it from time to time. This one is especially fun, because I sort of studied at USC under one of the authors several decades after he published this paper in 1993. 

If you want to read the paper yourself, it is available here:(https://www.nber.org/papers/w4332.pdf)

The paper is trying to come up with a working model for housing prices. Houses are one of the largest assets that people own and as such, there are nearly infinite inputs that affect their price. On the demand side, it could be age of the borrower, the ease of capital, jobs, wages, changing tastes, household formation etc. On the supply side, it could be ease of permitting, tax policy, cost of labor, regulation, competition etc. However, this paper is part of a conversation that is trying to test how much or even if, the age of borrowers matters on the macro level. 

For instance, Japan on average has the oldest citizenry in the world. How has those people’s buying habits for housing changed over their life and how has that affected the market? When they start dying and Japans population shrinks, what happens? Do people abandon the houses? Or maybe they make smaller families and use all of the houses? Do people choose to abandon the cities and choose to live in country, or does the opposite happen? There are lots of ways to look at this question in general. This paper is asking a fairly narrow question though: 

In the US, does an increase in population have an affect on housing prices?

To do this, it uses census data from the 1970s, 80s and 90s and then tries to extrapolate what will happen in 2010. The author concludes that yes, demographics matter when it comes to housing. In general, as purchasing power increases into your 30s and 40s, people tend to be more interested in buying houses, which push house prices up. 

Looking back, we now know that housing prices did increase from 1993 to 2010. This paper simply looked at demand, but I would argue that that demographics aren’t the main reason housing prices went up as dramatically as they did in the 90s and 2000s (especially 2000s). Instead, I suspect that cheap money coupled with an anti-development cultural shift on the coasts and an economic shift away from agriculture and manufacturing in the midwest and south were the main reasons that house prices on average increased over the last 30 years or so.

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