So this is another issue on which I wanted to marshal more charts and evidence but at some point its worth it just to make a statement.
If you look across the demographic survey’s what looks to be the biggest effect of the recession has been to delay adulthood for folks born around 1990.
Rather than graduating high school or college and getting their own apartment and their own car, they stayed with or moved back in with their parents. This drove down household formation and drove down the demand for automobiles.
Indeed, the per capita stock of both homes and cars has been shrinking and the actual stock of cars has been shrinking over this period.
However, this will not last. There is nothing about America which says that lifestyles are forever changed. Young people themselves don’t say that in surveys. Firms of all shapes and sizes do not seem to be repeating that perception.
Folks think that this is unusual. That times are tough and people are having to rough it. Not, that it just doesn’t make sense anymore to move out in your 20s.
The more complete economic-y story address how the long term growth path was affected by financial innovation, the resulting deviation and the resulting return.
However, the short, short story is that after the collapse the risk premium associated with loaning individuals money for cars and houses went up and so either interest rates had to go down or marginal returns had to go up. Because interest rates could not go down, marginal returns went up.
Yet, this can only happen if the capital-to-labor ratio falls which is precisely what we mean by saying folks moved back in with their parents.
Still fundamental tastes and technologies have not changed. As the risk premium falls the return will also have to fall which means the ratio will rise, which in turn means heavy production of cars and homes.
We can – and I think have gotten – a clue as to when this is going to happen when the rental rates on these things rise. For homes, we can get that directly by reading rents. For cars we can look at the dynamics of the used car market, which will tell you how much maintenance cost people are willing to put up with.