Homeownership and the wisdom of markets

Here is an article from Meta Brown, Sydnee Caldwell, and Sarah Sutherland at the New York Fed (HT: Mark Thoma).  Here's the take-away:

(T)he failure of young consumers, and particularly the comparatively skilled young consumers of our student loan group, to re-enter the housing market remains a puzzle. Many factors could be contributing to this phenomenon, including growing student debt balances, limited access to credit, lowered expectations for future earnings, and perhaps even a cultural shift by which young people—whether they went to college or not—are deferring home purchases. Whatever the cause of student borrowers’ reticence, the housing market rebound of 2013 appears to have proceeded without the help of this skilled set of young buyers.

This is good news, and it's a good example of the wisdom of markets.  With real long term interest rates at 1%, home prices should be high and volatile.  Homes are very bond-like in this environment, and, speaking strictly from a portfolio construction point of view, they have no place in a young person's portfolio.  Young families should size-down, rent, and put their money in the stock market.  In 20 years, when the baby boomers are selling their homes and long term real rates are at 4%, then these young families should buy.

It might be a good rule of thumb for portfolio management for non-boomers to just ask, "What do the boomers need to hold", and then take the opposite position.

Homes have always been a good investment for just about everyone who could arrange the financing.  They are still a great investment for people who need bond-like exposure (baby boomers) but they are not currently a good investment for everyone.  The market represented by young families has figured this out, even if individual families, social convention, regulators, the GSE's, and the New York Fed haven't.