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By New_Deal_democrat August 7, 2015 2:12 pm
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Housing: the pent-up demographic demand is there

This is the second of three articles about the US housing market.  My argument is that ex-housing, the US economy is in deflation. And as I wrote on Tuesday
part of the strength in the housing recovery is increased demand by foreign buyers.   

Today I show that both rents and housing prices are supported by demographic fundamentals. In my next post I will show that wage-adjusted prices don't suggest that housing is in a bubble either. ex- foreign demand for US housing, the US economy is even deeper into deflation argues strongly against the Fed hiking interest rates.
So let's start.  One big argument against the Fed raising rates is that, ex-housing, US prices are in outright DEflation:

House prices continue to rise stoutly, either as measured by the Case Shiller index, or the median price for existing homes, which are about 90% of the market:

This despite the fact that real wages have barely budged in the last 5 years:

So what is going on with house prices?  One argument is that housing is in a new bubble (political calculations).  I don't think so.  When the housing bubble was truly inflating in 2003-05, median asking rent was flat:

which means that, in real terms, it was actually falling! People were abandoning apartments because "everyone knows housing only goes up!"  But notice that in the above graph, rents have been increasing smartly ever since 2012, which coincided with the bottom in house prices.

Further, both homeowner and apartment vacancy rates have been declining, apartments to a new record low:

So this doesn't look like a bubble. Houses aren't being preferred to apartments.  Rather, the increase in both home and apartment prices together strongly indicates that it is a matter of supply and demand.  In particular the large Millennial generation has arrived at apartment renting and home buying age:

and a larger proportion than in the past is still living with their parents, which is presumably not their first choice:

So the pent-up demand is definitely there.  The increase in the both rents and the price of houses  is being driven by fundaments.

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