Say you bought a sprawling ranch-style house in 2007, with a guest room just begging to be turned into a nursery. If you lived in Las Vegas, that house today would probably be worth barely a third of what you paid. If you bought in Phoenix or Miami or Detroit, it would be worth about half your purchase price. In every case you’d most likely be underwater on your mortgage, with no hope of tapping your equity for a loan to defray the cost of a new crib and Winnie-the-Pooh wallpaper. Ask yourself: Is that the sort of world into which you’d want to bring a child?
No way, economists suggest—at least not compared to the world at the height of the housing boom. An emerging set of economic research shows that rising housing prices lift the fertility rate, too. Amid the current housing crash, in contrast, birth rates are falling like a Slinky descending the stairs. This could be bad news for the American economy and for the financing of social services in decades to come. Even a modest decline in fertility could stick the United States with the sort of aging pains that Europe and Japan are grappling with today.
The link between home values and family values is borne out by complex mathematical formulas developed by two University of Maryland economists, Lisa J. Dettling and Melissa Schettini Kearney. It starts with the simple calculation that every prospective parent makes: Can I afford to raise a child? (Or, for current parents, another child?) Helpfully, the Agriculture Department annually tallies up the costs of child-rearing. For a typical married couple, the department said in its latest report, housing accounts for a third of those costs—as much as food and child care combined.
You might think, then, that rising housing prices might discourage would-be parents. That appears to be true for people who figure they’d need to buy a home to accommodate a baby. Indeed, among renters, a 10 percent rise in housing prices reduces the fertility rate by 1 percent, Dettling and Kearney reported in a paper late last year. But that change, the economists found, is swamped by a reverse effect among couples that already own homes: A 10 percent rise in housing prices increases homeowners’ fertility by 4.5 percent. That’s because rising prices make homeowners feel wealthier. Thinking of their home as a nest egg, they save less and spend more, and they can borrow against their equity.
Homeowners use some of that newfound wealth, according to evidence that Dettling and Kearney cited, “to fund their childbearing goals.” Similarly, a recent paper by Purdue University economist Keith Mumford and Cornell’s Michael Lovenheim concludes that the “large recent variation in the housing market could have sizable demographic effects that are driven by the positive effect of housing wealth on fertility.”
These days, this bodes poorly for the birth rate—and for the economy. The drop in home values from 2006 to 2010, Dettling and Kearney found, corresponded to a 4.3 percent decline in births. And when housing prices plummet, as they have since the real-estate bubble burst in 2007, homeowners spend a lot less. This goes far to explain why the U.S. economy has struggled to regain its stride after the Great Recession and also why the Obama administration—after years of fumbled efforts to help stabilize the housing market—released a proposal this week to help underwater homeowners refinance their mortgages at lower rates.
Prices continue to decline nationwide, according to the Case-Shiller housing index released this week—and so does the birth rate. After reaching a recent peak of 2.1 babies per woman in 2007, the nation’s fertility rate has shrunk to 1.9 babies per woman, according to the Census Bureau. The states where prices have plunged the most—led by Nevada, Arizona, and Florida—have also seen their fertility rates fall more sharply than in any other state.
This baby bust isn’t an emergency—yet. U.S. fertility rates sank even lower through much of the 1970s and 1980s. But if housing prices and birth rates keep sliding, the nation’s economy would suffer down the road. Eventually, fewer children become a smaller workforce as a share of the population. That is bad for productivity, economists say—young workers work hard and generate innovations that recharge economies. It also means fewer workers to shoulder the health and pension costs of older workers who retire and live many more years. This is the problem that Europe and Japan now face—and that the United State could soon share.
“Fertility declines and growth in aging populations pose a fundamental challenge to the financial viability of the welfare state in much of the developed world,” the nonprofit Social Trends Institute concluded last year. Robust economic growth, the group said, requires a sustained fertility rate of at least 2 children per woman.
The U.S. birth rate will bounce back, the report suggests, if the economy rebounds in the next couple of years—but a prolonged slump would leave fertility in a free fall. Just this week, Standard & Poor’s found “few, if any,” signs that home prices are about to revive. “Oh, bother,” as Pooh would lament.
This article appeared in the Saturday, February 4, 2012 edition of National Journal.
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