Home Prices and the Birth Rate

Back on Feb. 12, we looked at the relationship between the US birth rate and stock prices.  There is perhaps a more interesting and more logical relationship worth exploring involving the birth rate and home prices. 

For his 2000 book Irrational Exuberance, Yale economics Professor Robert Shiller researched home price data going back to 1890.  He makes that data available in Excel format on his web site, along with Cowles Index stock price data back to 1871 and some other interesting data.

The home price series in this chart is Shiller's "Real Home Price Index", which adjusts for inflation.  We already know that we have just been through a big housing bubble, but when we see this inflation adjusted home price series, the severity of that housing bubble becomes all the more clear. 

Setting the bubble issue aside, the correlation of the ups and downs in the home price data and the birth rate data are a fascinating relationship.  Part of the cause and effect makes sense: more babies take up more space, so families have to trade up to bigger homes, putting more pressure on home prices.  But there is a deeper issue to that relationship, and that is the choice to have more babies. 

The birth rate understandably fell pretty sharply in the 1930s, when the Great Depression had a huge negative effect on the economy.  It rose again as the buildup for WWII brought the economy back, and as the postwar period brought new technological innovations into the economy. And the housing prices responded also to the ups and downs of the economy.

The correlation can even be seen on a smaller scale during the ups and downs of the 1980s and 1990s.

The most recent year for which the birth rate data are available is 2006, so it will be a while before we know how the birth rate may have changed with the collapse of the housing bubble.