Small Spaces: Real Estate and Consumption

The American public is broke and overworked. People will no longer be buying homes like they once did. Instead, they’ll be be living in smaller homes or renting. Data shows that asking rent for vacant rent units has steadily risen over the years due to a shortage of rentals. Investors with the capital will buy the surplus homes and rent them out to capitalize on the growing demand for cheaper, more affordable housing. Given the low rates, one should consider buying and renting homes now.

Because renters own less automobiles than their home owning counterparts, urban areas will increase in popularity as walking and riding bikes becomes a more affordable way of travel. This means more frequent shopping outings. In addition, small living spaces means less consumption. People will no longer have the available space to store their goods. Those who downsize will seek storage centers. Given wage stagnation, the next generation of workers will probably be consuming much less than their parents. This will have negative impacts on our economy.

Student debt has risen exponentially over the years, with the government accruing the most nonrevolving student debt.  Seeing as how the government is already struggling to make ends meet, this isn’t a good sign. If the debt bubble pops, the government will have a mess on its hands, but due to laws that prevent defaults on student loans, most of the damage will occur with the borrowers and severely constrain their consumption.  Wage stagnation, coupled with rising debt, specifically student and credit debt, will lead to declines in aggregate consumption.

On a side note: does effort increase as financial rewards decrease? That makes me think there is method to all this madness: maybe increasing taxes isn’t so bad for the national economy? Maybe wage stagnation isn’t so bad for the economy after all? After all, despite decades of stagnating wages, productivity has continued rising. I recall economist David Levine who argues in favor of the “income effect” resulting from higher taxes or, more exactly, the   propensity to work longer and harder because they are receiving less. But that’s another discussion. Moving on…

As the baby boomer generation exits the work force during the next few years, so too will their consumption on normal goods and services due to more diligent saving. Instead they will consume more health care services. This will increase the growth of the health care industry. They will also see financial advisory and wealth management services, leading to increases in the finance industry. Also, retirement (or over-60) community real estate will experience a surge in demand.


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