The Continued Slow Deflation of the Housing Bubble
The stock market perked up last week. Does that signal the beginning of a return to the good old days? After all, the Obama economic team is feverishly pulling out all of the stops in its attempt to restart the residential real estate markets in a positive direction.
Although the tide may turn slightly, I’m skeptical about whether we are going to see a return to meaningful long term growth in residential real estate values.
Baby Boomer Sellers Will Depress Real Estate Prices
An even bigger long term problem is likely to be the price lowering effects caused by 78 million baby boomers moving down and perhaps out of traditional real estate markets entirely. That is precisely what some experts have been predicting, even before the recent price crash.
Two planning scholars from USC published in 2007 a careful and detailed analyis of the relationship between aging of 78 million baby boomers and residential real estate prices.
The theory is this: Real estate prices are dictated primarily by supply and demand. (No mystery there, although mortgage interest rates are also a factor.) For prices to go up, demand for single family housing must at least equal or exceed the supply. I think we can all agree on that.
Enter the baby boomer factor. Beginning in 2011, baby boomers will begin turning 65. At this point – for the first time in our history – the growth rate in the elderly population will exceed that of younger adults. According to the research, the ratio of 65+ adults to working adults (25-64) will increase by 30% in the next decade and by another 29% in the following decade. In some states, the jump in ratio of old to young will be even worse, with Arizona leading the way at +89%.
The study authors then looked at historical home buying and selling rates for different age groups. Here is a graphical representation of what they found:
Note how and where the lines cross. Older folks are big time home sellers. Assuming that aging boomers act in accordance with historical trends, the number of sellers will begin to exceed the number of buyers in many if not most states in the next 10-20 years. It’s already happened in some states. (Read the full article to see where your state fits.)
This is the conclusion from the study authors:
In sum, supply will be dominated by the actions of aging homeowners who have little ability to postpone decisions, and home builders who cut back as little as possible. Large builders will shift to markets with good growth prospects and scale back their operations elsewhere. Other builders will find niches of underserved demand, particularly among the elderly, even in stagnant or declining markets. Thus we expect the number of properties for sale to grow ever larger, creating a buyer’s market, and vacancies to accumulate in less desirable neighborhoods and parts of the nation.
Makes sense doesn’t it?
This research is consistent with events that occurred since the report was published. It also confirms data discussed in two earlier articles I wrote. One concerns the general economic effects of the baby boomer demographic slide. The other article discusses a likely decrease in demand for, and valuations of, suburban residential real estate.
Strategies in Response to Deflation of the Housing Bubble
So what does a homeowner do with this information? First, it depends on where you live. Different states and regions will be affected differently, in some cases radically so. If you live in the northeast, residential real estate values in suburban neighborhoods occupied by baby boomers may stay flat or decline over a period of many years. In other words, don’t count on making money on a home purchase in those areas.
Neighborhoods may experience a general decline in valuation, making them more affordable to younger buyers. However, as the authors point out, these declines will adversely affect revenues from property taxes. Local governments in suburban areas will feel this. The reaction may be a sharp increase in tax rates, to compensate for the lower tax base.
Excluding retirement meccas, urban residential properties may be the only sector where values will generally increase over the next decades.
One interesting response suggested by the study authors is to increase demand by increasing immigration. Folks who make their living building houses will certainly take notice of this.
The bottom line for me is that the baby boomer effect cannot be ignored when assessing how (or if) home ownership fits into your personal financial plan.
Think about where you live and what you live in, read the article, then decide for yourself what is your best course of action. That’s what Mr. ToughMoneyLove is doing.