This amazing graphic from another blogger, Worthwhile Canadian Initiative shows the amount of equity in U.S. and Canadian housing since 1990. Two things to note: First, as far as Canadians are concerned all the increase in house price is accounted for by more debt – recently there has been negative equity build-up in the Canadian housing stock, because house price are increasingly financed with debt (instead of equity). The second item is the level of “equity” in the U.S. housing stock, it is today equivalent to the level last reached in 1978, or as Stephen Gordon says: “Nineteen seventy-freaking-eight”32 years ago
Interestingly the peak in U.S. home equity occurred in 2006, with deceleration in 2005, an interesting match with the housing crisis. Here in Canada the situation was slightly different (as was the hiccup in housing prices) that was about 9/12 months later than in the U.S. (See the Teranet National Bank house price index).
The most interesting analysis of U.S. housing dynamic relates to the “changing of the guards” occurring in the U.S. as the baby-boomer begin to retire (apparently at the rate of 1,500 per day…) their housing needs are changing. Imagine your parents, the kids have moved out and mom and dad decide to get a down-town two bedroom apartment. Basically, their housing needs goes from 2,500 sqf house to a 1,000 sqf apartment. Problem is that Gen-X doesn’t have the income to buy mom and dad’s but more importantly as a demographic they are far less numerous. On the basis of the generational shift, it would seem that U.S. housing demand will decrease by 4.3 billion sqf, or 1.7 million homes that’s out of a 140 million homes (that’s 4%).
The issue for home buyers then becomes more complex as the issue of home appreciation (forgetting for a second the current overhang due to economic dislocation, since even if people are not renting, they will live somewhere), this is a pure demographic analysis, that will worsen as the babby-boombers move from 1,000 sqf to assisted living facilities that even smaller. The long term impact is to make your house less a store of value, and more a place to live. Implications for the preference of ownership vs. rental become more uncertain.
Note: I think there is a problem with the Canadian data, because the BoC stats shows that as of 5 months ago the amount of equity in new home purchase has actually increased, which would make the above graph incorrect -- because house prices are still rising. The wrong series may have been used...