You’ve undoubtedly seen stories about how baby boomers are causing chaos on real estate or housing markets, as written on different real estate news sites. They drive up prices, living in their homes for far too long, and increasing rental markets. According to some estimates, boomers will trigger regional housing market crashes in the upcoming years.
But, are baby boomers’ behaviors really that bad? Is it possible to predict the direction of home-price trends by analyzing the homeownership decisions of aging boomers?
More than 67 million homeowners in the United States are over the age of 55, this is according to Freddie Mac. They own roughly two-thirds of all home equity in the United States. Approximately 63 percent of these owners intend to age in place, while the remainder intends to make at least one more step. Amongst these movers, 71% intend to rent rather than purchase their next home.
Stories that describe baby boomers as a big cause that makes housing unfeasible for younger buyers make sense. The average stay of baby boomers in their home has increased from six years to ten years prior to the 2008 recession because they are not moving & relocating as much as they used to, compared to before. This will reduce the availability of resale listings and potentially drive up home prices in markets with restricted new construction and high demand, if this pattern continues.
Another significant issue is that boomers who intend to sell their homes and rent afterward would place a strain on the supply of affordable rental housing. Because of the scale of the baby-boomer generation, there could be an increase in older homeowners making rental rates costly for younger households or buyers.
There are also fears of boomer bubbles, which are substantial price corrections in boomer enclaves after aging homeowners die or are unable to live independently. Younger households, we are told, prefer “happening” urban settings, so there is a little possibility they will be eager buyers of aging boomer homes, suggesting that it is only a question of time before home prices in places like Phoenix, Las Vegas, or the Villages in Florida deflate.
However, what these boomer-shaming reports fail to recognize is that housing supply responds to shifts in demand. While a lack of sufficient supply is still a major issue, metro areas with the highest employment growth are also taking the lead in entry-level construction. When supply is low, areas that were historically not being used for housing developments are often repurposed, as in L.A.’s Arts District or the major rail-yard conversions that occurred in Jersey City.
And, before you hesitate and postpone your plans to buy a retirement home in Sun City or Delray Beach, try a different angle on the forecasts of major deflation in such locations. Various studies on the subject have shown that differences in house prices between cities are more closely linked to variations in job rates, real income increases, and building costs than to demographic changes. If an area is economically viable, with prosperous trade and employment opportunities, the young will come, and housing markets will be maintained.
The “inevitable crash” in retirement-community prices is based on demographic changes that will occur in the next 20 years. That’s a long period of time when compound interest is at play. The price level will rise by nearly 50% over the next 20 years if the Federal Reserve meets its 2% inflation goal. If retirement-community sales rates remain steady for the next 20 years, they would have dropped by half in real terms, leaving plenty of space to draw younger generations to retirement communities without causing existing home prices to fall.
Furthermore, the fundamental idea that younger generations would reject suburban-style living is being called into question. According to new Census Bureau reports, millennials are overwhelmingly leaving the city for the suburbs. An estimated $8 trillion in baby-boomer home equity is passed on to the next generation and this transition is likely to accelerate in the future.
How much weight can we put on forecasts of boomer-induced home price worries? Extreme caution is recommended when it comes to predicting potential real estate values. Consider two well-known examples.
A 1989 study conducted by two well-known Harvard economists projected that the aging of the baby-boomer generation will reduce housing demand and result in a major drop in real home prices. “If the historical trend [between births and housing demand] persists over the next two decades, housing prices will decline to levels lower than seen at any point in modern history,” the professors concluded. Of course, the inverse has occurred.
Then there’s this. Seattle’s economy was in trouble in 1971. Boeing had laid off over 60,000 people, and the future of Seattle was reflected in the words of a popular advertisement from the time: “Will the last person leaving Seattle turn out the lights?” The city now has some of the most expensive real estate in the world.
Our advice: Be wary of predictions, particularly those about the future.
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