The Recovery's Silent Assassin Is Demographics

It's emotionally satisfying to blame the economy on people -- banks, borrowers, politicians -- because people can change. But the greater threat is demographic make-up of the country.



We've heard it so many places that we don't question it. Household debt is what's holding back the recovery in the US. Or it's Obama's fault. Or the Fed's. Or George W. Bush's. The only problem? It isn't true.We can think of household debt as comprised of two segments - mortgage debt and everything else.

Let's start with "everything else" - household debt minus mortgage debt relative to GDP. Since 1965 it has hovered in a range of 16% to 22% of GDP. Since 2008 it has fallen a couple points, and is back to roughly 1995 levels. It never had a huge run up in the 2000s. It's still elevated relative to the 1970s and 1980s, but with interest rates now far lower than they were then, the burden is manageable, with homeowner interest payments on consumer loans relative to disposable personal income (DPI) already back to early 1995 levels.

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Mortgage debt surged in the 2000s, and remains very elevated relative to historical norms. This is what the "new normalists" focus on.

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Three comments: First, we're making good progress. Mortgage debt to GDP has been falling by roughly 1% per quarter. At this rate we'll be back to normal in four years. Second, interest rates, and hence mortgage payments, are far lower today than they were in the mid 1990's. Back then mortgage rates were around 8%. Today they're below 4%. Mortgage debt servicing payments as a percentage of DPI is at 9.18% as of Q1 2012, its lowest level since Q2 2002. The low over the past 30 years was 8.67% in Q1 2000, and it's likely that by the second half of this year household mortgage burdens will be at a 30-year low. And third, just as it's not helpful to think about a "national average temperature," if you want to know the weather forecast, the breakdown of homeownership -- and hence mortgage debt responsibility -- matters.

For instance, while the overall homeownership rate at 66.1% is above the 64% it was at during the late 1980s and early 1990s, for all of the age buckets between ages 35 and 50, homeownership rates are already at 30-year lows (see Table 17).

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The overall homeownership rate looks like it still has room to fall because, 1) baby boomers, especially the older ones, never sold their houses - the homeownership rate for those age 55-64 is at 78.5%, and has averaged roughly 80% since the 1980s, and 2) as the population ages, and given that older people have higher homeownership rates than younger people, the overall homeownership rate rises.

OK, so the homeownership rate of people age 35-49 is at multi-decade lows. Why does this matter? Because young homebuyers power the US economy.

Presented by

Conor Sen, a former hedge fund analyst, works for an Atlanta-based financial technology startup.

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