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Demographics- Last Nail in RE's Coffin?

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  • Demographics- Last Nail in RE's Coffin?

    The Next Housing Bubble - Is This the Perfect Storm?


    Wednesday, 15 December 2010 10:40

    In surfing the tubes that make up the internet (my apologies to the late Senator from Alaska), I happened upon this article from the Journal of the American Planning Association. The article is entitled "Aging Baby Boomers and the Generational Housing Bubble". It is a fascinating analysis of what could bring a fatal blow to the idea that our houses will form the bulk of our assets as those of us that are baby boomers enter our retirement years. Unlike the short-term "temporary" meltdown in house prices created by the subprime mortgage issue of the past two years, this long-term demographic price correction could have a permanent impact on the housing market.

    Traditionally, the generation that parented baby boomers has watched house prices rise, at times seemingly exponentially, and have sold their homes at prices that are often orders of magnitude more than what they paid for them decades earlier. In large part, the sale of these assets has provided funds for their retirement years. As baby boomers, we have learned this lesson (perhaps a bit too well) and have patterned much of our financial planning with a similar target in mind. Sure saving money from our weekly paycheques is a good idea but it's hard work and requires discipline and, after all, we can count on using the equity we have in our homes to make up the difference between what we save and what we need to retire with very little effort on our part. After all, house prices have nowhere to go but up....eventually.

    This study by Dowell Myers, a professor at the Univeristy of Southern California School of Policy, Planning and Development and co-authored by SungHo Ryu studied the relationship between the 78 million baby boomers and the housing market and what effects aging baby boomers will have on the housing market in the United States as they retire, relocate, downsize and eventually leave the housing market. The large numbers of this cohort has largely driven the real estate market since they first entered it in the early 1970s; burgeoning demand for homes drove prices and inventories ever higher seemingly unendingly, especially if one listens to real estate associations.

    According to the study, sales of existing homes make up 85 percent of the homes sold today. Senior citizens are by and large the suppliers to the housing market as they downsize, move into senior's residences or pass away. Those over 65 years are proportionately more likely to own their own homes in comparison to younger adults so they are more likely to have houses to sell. The first baby boomers are slated to reach their retirement years at the age of 65 in 2011 and the last will pass through the "gate" to seniorhood in 2029 so it seems likely that the effects of this demographic change on the real estate market will be seen sooner rather than later. As well, a decrease in the number of younger, first-time home buyers means that the housing market will feel additional stress from shrinking demand at the same time as it faces rapidly growing supply. This does not bode well for prices since the supply of available housing will be increasing at the same time as the demand for that housing is decreasing.

    Here is a chart from the United States Census Bureau showing the projected changes to the demography of the United States over time for the years 2010, 2030 and 2050:



    Notice how the bulge in the population age pyramid travels upwards particularly in the 2030 projection? This indicates an overall aging of the population as the baby boomers reach their senior years. Also note that for the 2030 projection, the number of people in the age groups under 45 years of age increases much less in proportion to those who are over 65. From a housing perspective, that means that there are fewer people that will be entering the housing market than those who will be leaving.

    Here's another chart showing what percentage of the population will be over 65 by state comparing the year 2000 to projections for the year 2010 and 2030:



    Notice that the overall nationwide over 65 population only increases from 12.4 percent to 13 percent in 2010 because the baby boomers have not yet reached that age bracket. The big change occurs after 2010 and the U.S. Census Bureau projects that the percentage of those over 65 will rise to 19.7 percent of the total population. Some states will be more affected than others; Florida, Maine, Wyoming, New Mexico, Montana and North Dakota will each have more than one quarter of their populations being aged 65 and over. That will have a major impact on their local housing markets. Data from the Centres for Disease Control puts life expectancy at birth at 77.9 years in their latest study that examines all deaths in the United States for the year 2007. This tells us that it is most likely that the baby boomers that reach the age of 65 in 2011 will most likely not be around by 2029 when the last of the boomers reach 65 years of age. Those senior boomers who own houses in 2011 will in all likelihood not own homes by 2029 which is part of the supply problem.

    Another factor that is affecting home ownership by the generation following the boomer generation is the lack of affordability especially when one compares median house prices to median income level. Dr. Myers gives the example of house prices in New Jersey where the median house price to median household income multiple rose from 2.89 in 2000 to 5.00 times the income of young adult households by the year 2005. Some states showed much greater ratios of median home values to median incomes of household heads between the ages of 30 and 34, California, Hawaii, Nevada, New Jersey, Rhode Island and Massachusetts being particularly problematic in 2005. There is no doubt that the recent decline in housing prices has improved affordability in these markets but houses are still unaffordable for many families that are in their prime home purchasing years. For further information on housing affordability, I highly recommend the 6th Annual Demographia International Housing Affordability Study 2010 which shows which parts of the United States have the least affordable housing as measured by a multiple of median price to median income.

    What is rather critical to Dr. Myers' thesis is the crossover point where selling of homes exceeds buying. The problem will be most severe in states where the older population is large and sells their homes at a young age and where the population of young buyers is growing slowly or is stagnant. From the study, it appears that the northeastern states are the ones where older homeowners sell in greater numbers than younger homeowners buy as shown in this chart:



    Baby boomers were born over an 18 year period of time; it is likely that the housing sell-off (and accompanying price declines) that takes place will take far longer than a normal correction in the housing market, most particularly when compared to the price decline seen in the past 2 to 3 years. The baby boomers born in the late 1950s and early 1960s are likely to suffer the greatest price drops since, by the time they are ready to sell their homes, the supply of real estate for sale will be approaching its peak.

    Home equity forms a very important part in the retirement savings of many American households and real estate is more widely held as an financial asset by Americans than other asset.

    While it is comforting to think that the equity that we have built up in our homes is the key to a secure retirement, shifts in the demography of nations in Europe, the South Pacific and North America may prove that paradigm to be a fallacy.

    http://www.oyetimes.com/views/column...-perfect-storm



  • #2
    Re: Demographics- Last Nail in RE's Coffin?

    Finally. Its bigger and nastier than you think. Its World Wide its just getting started.
    And where will these aging billions of old persons spend (or park)their money.
    I'm long Funeral parlours and the things that keep you from them

    Comment


    • #3
      Re: Demographics- Last Nail in RE's Coffin?

      Don't forget dog food!

      Comment


      • #4
        Re: Demographics- Last Nail in RE's Coffin?

        Originally posted by thunderdownunder View Post
        Finally. Its bigger and nastier than you think. Its World Wide its just getting started.
        And where will these aging billions of old persons spend (or park)their money.
        I'm long Funeral parlours and the things that keep you from them
        That line of reasoning is interesting.

        I expect most of the aging cohort that is the last vestige of America's big middle class will have their life savings plundered by 1) strong inflation (poom), and 2) predatory wall street practices that front run and pillage their retail 401K and IRA vehicles ( mutual funds and fixed-income funds).

        That implies that in the long term there will be far less money made by the health care industry, funerary, assisted living, retirement communities etc. Maybe one should short those industries.

        Perhaps Flintlock’s comment is a better strategy – dog food. Go long Ralston Purina, which is now part of Nestle Holdings Inc.

        Comment


        • #5
          Re: Demographics- Last Nail in RE's Coffin?

          If these aging boomers can't sell their homes, the only option for them will be to stay in them; I'm looking for home healthcare investments to go long in.

          Didn't most people die in their own homes 100 years (or less) ago...?

          Comment


          • #6
            Re: Demographics- Last Nail in RE's Coffin?

            Originally posted by jneal3 View Post
            Didn't most people die in their own homes 100 years (or less) ago...?
            And prior to that, grandpa wandered into the woods, never to be seen again

            Comment


            • #7
              Re: Demographics- Last Nail in RE's Coffin?

              Originally posted by jneal3 View Post
              If these aging boomers can't sell their homes, the only option for them will be to stay in them; I'm looking for home healthcare investments to go long in.

              Didn't most people die in their own homes 100 years (or less) ago...?
              Yes, but they owned their homes free and clear. Today, many boomers are a year from retirement with 25 years left on a 2005 refi and no ability to sell because they are underwater.

              The article misses this important factor. It suggests that boomers will stay in their homes until, on average, 2029. I disagree. Unless they start liquidating their IRA (average balance is less than $45k), most of them with any mortgage debt will be forced to default and that home will hit the market much earlier than 2029.

              This is where we need somebody to prepare the data. What percentage of soon-to-be-fixed income retirees have no equity in their home? What percentage of their SS income will their mortgage payments be?

              Another issue the article doesn't quite address is the buy side. It assumes that future young buyers will have the same financial resources (i.e., down payment and income) to buy the boomers homes as the boomers had to buy their parents' homes. Not true. Just look at all of the ways in which we are guaranteeing that our children (I am a boomer) will have LESS ability to buy than I did at their age: 1) they must compete for income in a global market where they are the high-priced worker; 2) they are entering jobs where benefits and wage increases are being cut off for workers below a certain age, usually 50-55; 3) their own retirement is being downsized through extended retirement ages and greater required contributions as a percentage of their lower income; 4) technological innovation + globalization = the above trends are likely to continue.

              A fifth, and probably most important factor is the absense of credit to buy a home. We boomers had 10, 5, 3 and even zero down programs with ARMS, Options ARMS, no doc, low doc, NINJA loans. Our children will have no such thing. Once Fannied and Freddies' lines of credit are stopped by a Republican Congress and their failures are behind us, there will not be any political support for resurrecting those models at any time within the next generation. Think how long it took for the 1920's "bucket shops" to come back via financial engineering in the 1990's ---- yup, one generation. And tulips never came back. As housing is always a leveraged buy, the availability and price of credit will have a dramatic and negative effect on demand.

              Our children are entering this future as members of the most over-housed country in the world. If you count bedrooms and not homes, supply is many times the official count. This is the key metric. I predict that boomers will NOT be able to sell their homes but, instead, will rent out rooms. They will undercut apartment rates to attract tenants. Young people will be driven to rent the cheaper rooms by the lack of income sufficient to afford their own place.

              Potential investment idea: buy a home with many bedrooms near public transportation.
              Last edited by goodrich4bk; 12-16-10, 12:32 PM.

              Comment


              • #8
                Re: Demographics- Last Nail in RE's Coffin?

                goodrich4bk,
                As a baby boomer myself, I second your excellent post

                Comment


                • #9
                  Re: Demographics- Last Nail in RE's Coffin?

                  Well said.

                  Originally posted by goodrich4bk View Post
                  This is where we need somebody to prepare the data. What percentage of soon-to-be-fixed income retirees have no equity in their home? What percentage of their SS income will their mortgage payments be?
                  I can give you an answer to the second question. According to the Social Security Administration, as of November 2010 the average monthly social security benefit is $1073.80. According to the National Association of Realtors, as of October 2010 the average monthly mortgage principal and interest payment is $703. So it's 65%. Yeah that's gonna work out well... Ok, let's assume a married couple both receiving social security. In that case their mortgage payment is 33%.

                  Comment


                  • #10
                    Re: Demographics- Last Nail in RE's Coffin?

                    If you sell your house (assuming you can sell your house and recover your equity), what do you get for it? Monopoly money?

                    And where are you going to "down-size"? Some gang-invested condom in NYC or SF or Vancouver or Mexico City? Or would you prefer to "down-size" in London, or the Middle East?

                    And then when you do down-size, if you rent, your rent would go-up because your landlord would have rising-costs, too. Even if you own, your condom has rising costs, while your income is stagnant.

                    And then there is the small problem of banks not paying interest on your savings thanks to the ZIRP. The econ-frauds have their "tookis-lackers", and those "tookis-lackers" are now being "educated" in universities to destroy the savings of senior citizens to-morrow.

                    Yes, gold would help when you sell your gold, but when you sell your gold, it's gone. But you can't live on gold, at least not for very long.

                    Suppose you live to be 102, how would you pay for the cost-of-living? But then at 102, you have other worries. (That outcome is as good as life can get.)
                    Last edited by Starving Steve; 12-16-10, 01:50 PM.

                    Comment


                    • #11
                      Re: Demographics- Last Nail in RE's Coffin?

                      An old customer yesterday asked me if I was hiring. He's around 70! Seems he's been laid off since this summer. I had no idea he wasn't already retired as he is a friend of my parents and I just assumed he was. It kind of took me aback. He seemed really depressed. There is more the story, but it became apparent money is now very tight. I had always assumed he was pretty well off. Maybe he did too.

                      I have noticed that a lot of older folks are rather skittish about the stock market now. The crash of 2008 really did a job on many. Mortal fear. So the FIRE snakes may find it a hard sell to get that demographic back in the stock market. What they are falling for is the line," Never a better time to buy, buy, buy" about real estate. All they've know is that RE is something that always goes up and many who are scared of the stock market are putting money back into their homes. But I've also seen many downsizing and learning to live with less. 2008 was a real wake up to many of all ages.

                      Comment


                      • #12
                        Re: Demographics- Last Nail in RE's Coffin?

                        That SS payment won't pay most elderly people's RX drug bill these days.

                        Comment


                        • #13
                          Re: Demographics- Last Nail in RE's Coffin?

                          Originally posted by goodrich4bk View Post
                          Yes, but they owned their homes free and clear. Today, many boomers are a year from retirement with 25 years left on a 2005 refi and no ability to sell because they are underwater.

                          The article misses this important factor. It suggests that boomers will stay in their homes until, on average, 2029. I disagree. Unless they start liquidating their IRA (average balance is less than $45k), most of them with any mortgage debt will be forced to default and that home will hit the market much earlier than 2029.

                          This is where we need somebody to prepare the data. What percentage of soon-to-be-fixed income retirees have no equity in their home? What percentage of their SS income will their mortgage payments be?

                          Another issue the article doesn't quite address is the buy side. It assumes that future young buyers will have the same financial resources (i.e., down payment and income) to buy the boomers homes as the boomers had to buy their parents' homes. Not true. Just look at all of the ways in which we are guaranteeing that our children (I am a boomer) will have LESS ability to buy than I did at their age: 1) they must compete for income in a global market where they are the high-priced worker; 2) they are entering jobs where benefits and wage increases are being cut off for workers below a certain age, usually 50-55; 3) their own retirement is being downsized through extended retirement ages and greater required contributions as a percentage of their lower income; 4) technological innovation + globalization = the above trends are likely to continue.

                          A fifth, and probably most important factor is the absense of credit to buy a home. We boomers had 10, 5, 3 and even zero down programs with ARMS, Options ARMS, no doc, low doc, NINJA loans. Our children will have no such thing. Once Fannied and Freddies' lines of credit are stopped by a Republican Congress and their failures are behind us, there will not be any political support for resurrecting those models at any time within the next generation. Think how long it took for the 1920's "bucket shops" to come back via financial engineering in the 1990's ---- yup, one generation. And tulips never came back. As housing is always a leveraged buy, the availability and price of credit will have a dramatic and negative effect on demand.

                          Our children are entering this future as members of the most over-housed country in the world. If you count bedrooms and not homes, supply is many times the official count. This is the key metric. I predict that boomers will NOT be able to sell their homes but, instead, will rent out rooms. They will undercut apartment rates to attract tenants. Young people will be driven to rent the cheaper rooms by the lack of income sufficient to afford their own place.

                          Potential investment idea: buy a home with many bedrooms near public transportation.
                          All excellent points!

                          People are making less, expenses are up, credit tight, how could they possibly hope to afford even the same standard of living?

                          People, especially younger ones, vastly underestimate housing maintenance as well. The McMansions built during the boom are just now getting to the age where that bill is coming due big time. They are finding out how much a roof and three or four new HVAC systems can cost. They are finding out they'll owe even higher property taxes when the local inspector who drops by to inspect those new systems finds out that finished basement they had built out was not reported yet. In my area they are adding $46 sq ft to your home valuation for finished basements. That works out to another $1000 or so a year in property taxes for a typical basement. Like Gomer Pyle used to say, "Surprise, surprise, surprise".

                          Comment


                          • #14
                            Re: Demographics- Last Nail in RE's Coffin?

                            Our children are entering this future as members of the most over-housed country in the world. If you count bedrooms and not homes, supply is many times the official count. This is the key metric. I predict that boomers will NOT be able to sell their homes but, instead, will rent out rooms. They will undercut apartment rates to attract tenants. Young people will be driven to rent the cheaper rooms by the lack of income sufficient to afford their own place.

                            Potential investment idea: buy a home with many bedrooms near public transportation
                            Kinda reminds of those old movies where the young girl goes to the big city to find fame and fortune and the first stop is a girl's boarding house. Not a new idea but has been the norm in the past.

                            I have an extra building lot I split off my property after I bought my house, a free split that cost us nothing and have been land banking thinking what the best demographic opportunity to build would be to get the best price.

                            I think what I am leaning towards now with the demographics is building a house on a slab with a water radiant heating system embedded, energy eff. super insulated etc. I think the key though to get the best price is to design in a in -law suite at one end of the house and another family suite at the other end with a common area/family room and kitchen in between. Most in-law set ups I have seen are usually awkward mods on an existing structure basement, attic, garage etc. I believe that designing a well integrated extended family house makes sense given the current forecasts More so than a single family spec house.
                            Last edited by tastymannatees; 12-16-10, 02:56 PM.

                            Comment


                            • #15
                              Re: Demographics- Last Nail in RE's Coffin?

                              That is great as long as it is allowed where you live. In my neighborhood, you can't even have two kitchens. That makes it "multifamily". But I've long thought the same type thing is a good idea. I lived for free when I was young and single. I'd rent out two bedrooms to friends and that paid my mortgage and utilities. ( cheap house) People will find a way to cope, if the government will just let them. I can understand why they have these rules, but some areas, hey, who the heck cares. It's better than an abandoned home sitting there attracting rats.

                              Comment

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