Economics and the mid-life crisis have much in common: Both dwell on foregone opportunities

C'est la vie; c'est la guerre; c'est la pomme de terre . . . . . . . . . . . . . email: jpalmer at uwo dot ca

. . . . . . . . . . .Richard Posner should be awarded the next Nobel Prize in Economics . . . . . . . . . . . .

Monday, May 23, 2005

The Flight to Smaller Communities

When people retire, they sometimes have a little less set aside than they had hoped to have available for their retirement. Also, in the future, many retirees will almost surely receive less in the form of gubmnt pensions than they have been led to expect. And, in a probablistic sense, some retirees on defined benefits plans [airlines? GM? other companies?] will receive smaller pensions than they had been expecting.

Other retirees may have earlier faced sufficiently serious life-threatening health problems that they decided to spend their money then and retire poor if they lived long enough to retire (which increasing numbers appear to be doing).

One way to increase the amount available for retirement is to downsize. Sell the big house in the high-demand area and move into something smaller. This appears to have been the current trend as northerners retired to Lakeland, Florida, though housing prices are rising there, now, too.
Elderly northerners are selling their houses for huge profits, buying comparable or smaller homes around Lakeland with cash, then coming for advice with perhaps hundreds of thousands of dollars in their pockets.

But with home prices escalating fast in Lakeland, [the trend] is not likely to last here much longer.
To get even more funds, some people will surely choose to sell the big house in an expensive location and retire to a dying community, such as a smaller rural town. As Tyler Cowen points out,

Positive shocks increase population more than housing (there is an option value to not building right away).
...meaning that housing prices in desirable areas grow rapidly, in the short run. Potential retirees with homes in these areas can often cash in on sizable capital gains.

Negative shocks decrease housing prices more than population (housing supply cannot contract readily).
Small towns, ghost towns, dying towns are all like this. Houses in many such places are very inexpensive.
The core intuition is that increases in housing demand boost supply [after a lag], but supply is durable so declines in demand show up mainly in price.
In Ontario, we see that many people with large, expensive homes in the Toronto metropolitan area find it worthwhile to consider retiring to, say, Stratford, where the level of amenities is high with theatre and music in abundance and housing prices considerably lower than they are in Trahnah.

By comparison with other communities, however, houses in Stratford are pretty expensive. People who cannot afford to retire to Stratford often choose small rural towns near hospitals for their retirement. The pace of life is slower than in the larger cities, the spirit of community satisfies nostalgic yearnings, and the savings in housing costs can be substantial.
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