The Breakdown: Baby Boomers Drove the Housing Bubble

Previous posts in this series:

The Breakdown
The Breakdown: The Young Aren’t Getting Enough Education
The Breakdown: Education Is More Necessary Than Ever
The Breakdown: Baby Boomers Have Higher Incomes

I still haven’t been able to nail down definitive proof for the claim that forms the title of this post but I think it falls well within the realm of reasonable inference. Consider the graph above, sampled from the invaluable blog Calculated Risk which was largely founded to report on the impending collapse of the housing bubble and whose reporting on that subject has been the best around.

As you can see the highest rate of homeownership is among those in the 46 to 64 age group. Further, when you multiply that rate of homeownership by the proportion of the population it represents cf. here, it’s apparent how large a proportion of all homeownership that comprises. I recognize that I’m doing a certain amount of handwaving here but researching this is hard and I’m writing a blog post not a doctoral dissertation.

Also consider this graph (thanks to Barry Ritholtz of The Big Picture).

As you can see it shows a very sharp increase in the value of household real estate (and mortgage indebtedness) as a percentage of GDP from 1976 to 2006. Coincidentally, this also represents the peak buying years of those born between 1946 and 1964, the Baby Boomers. That end date, 2006, is important and I’ll get back to it in a later post.

What has boosted home sales in recent years? According to Calculated Risk these were the most significant factors:

The turnover rate was boosted in recent years by:

  • Speculative buying (flippers).
  • Speculative buying by first time home buyers (using excessive leverage).
  • Move up buying, especially by Baby Boomers.
  • and recently by investors / first time buyers buying REOs.

The majority of subprime borrowers were Baby Boomers (nearly three quarters were white and a majority had incomes over the median). Baby Boomers are in significantly more debt than older or younger age groups. That’s referred to as the “cycle of purchasing” by some. Is it? Or does it just represent the life cycle of those born from 1946 to 1964? And it’s the period we’ve got the best data for.

Next post in the series: “The Breakdown: Age and Employment”

2 comments… add one
  • Maxwell James Link

    Makes sense to me.

    I’m wondering about the significance of escalating student loan debt in the picture you’re developing. According to your link the average Boomer debt is $20,700 right now; according a variety of resources I’ve seen online the average college senior graduates with $20-23K in student loans (PDF).

    I’d postulate that these debts should perhaps be looked at together, since a) College-educated Boomers often got out of paying their own loans, and b) They probably often end up helping their kids pay their loans as a result, especially since a lot of those kids choose majors that don’t pay well (I chose such a major myself some time ago).

    Overall, those two facts suggest to me that the debt level carried by the educated class in this country is even heavier than you are suggesting.

  • PD Shaw Link

    The debt calculations don’t include mortgages, which I think leaves some room for argument, but I found this report, which concluded:

    “Comparing homeowners in 1990 and 2000, older age groups have shown an increasing propensity to borrow, increasing both their debt balances and the age at which they can expect to be mortgage-free (Figure 7). This shift toward greater indebtedness later in life may mean that these cohorts will still be carrying heavy debt loads past the peak earning ages of 45-54 and even into retirement age, forcing them to work longer, sell their homes, or find an alternate ay to support continued high living expenses as their income eclines.”

    Figure 7 are some bar groups on page 13 of the pdf. It certainly shows less interest for baby boomers to be mortgage-free later in life. But it also shows an increasing willingness among those under age 25 to take on a lot of mortgage debt. I don’t necessarily disagree that the baby boomers drove housing trends for the last 40 years, but it feels like the bubble burst on a number of young people immitating the boomers with less resources to do so.

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