According to the U.S. Census Bureau (http://www.census.gov/prod/2010pubs/p25-1138.pdf), the baby boomer generation consists of people born between 1946 and 1964. Thus, the first baby boomers will turn 65 starting in 2011. As of 2010, the estimated number of Americans 65 and older is approximately 40.2 million; and, the size of that population demographic is projected to increase to 88.5 million over the next four decades. [“The Next Four Decades--The Older Population in the United States: 2010 to 2050-- Population Estimates and Projections” (May 2010), authored by Grayson K. Vincent and Victoria A. Velkoff.]
So, the question arises, what is the buying/selling behavior of people in this stage of their lives? Will they serve to bring to the real estate market a whole new wave of prospective inventory i.e. beyond those who were unfortunate enough to have bought in at the top of the market in ’05 and ’06, and who, have already unwittingly contributed to the excess inventory of homes on the market, as they have been, or are, currently getting washed out by way of the foreclosure process?
In an article by Charles Hugh Smith, entitled, “Housing Headwinds and Baby Boom Demographics” (04/13/10) (http://www.oftwominds.com/blogapr10/housing-demographics04-10.html), the author attributes “an[ ] extremely high rate[ ] of household formation…[to the] 78 million Baby Boomers [who] went out and bought houses.” By the Census Bureau definition then, these millions of home owners would currently range in age between 47 and 64.
And Vincent and Velkoff conclude in their report, “The population in the United States is projected to grow older over the next several decades. Much of this aging is due to the baby boom generation [this group between the ages of 47 and 64] moving into the ranks of the 65 and older population.”
The effect of the Boomers’ demand for housing and their effect on price is quite evident when one looks at the data. If we assume on average they started their ownership at say, 25 years of age, that would put the initial purchases for the oldest of the group at 1971, and the ‘wave’ of purchasing would have continued for the youngest of the Boomers through 1993. When one cross-references this time period with a chart of U.S. House Prices between 1890-2007, as provided in the aforementioned Smith article, the average nominal price for a house goes from approximately $25,000 to $87,000 from 1971 to 1993. Based on the above entry points, it is safe to assume that the Boomers, in the aggregate, had plenty of equity in their homes, as the nominal price crossed through $100,000, in 1998, and then as the slope/progression of the nominal price line literally went vertical, to just under $225,000, at the top of the market in 2006.
When these prices are adjusted for inflation, as reflected in that same chart, the average inflation-adjusted price of a home was $125,000. That number had remained pretty much static, going all the way back to 1953, and forward to 1998– a period of 45 years. So, even after taking into account inflation, Boomers had acquired a certain amount of wealth. Thirty year fixed mortgages for the first Boomers would have been paid off by 2001; and for the last, they would have had 17 years remaining for complete pay-off at the top of the market in ’06, and only 12 years remaining in 2011, when the first Boomers turn 65. And the point is, Boomers were not, and have not, been compelled to ‘feed’ their homes into the supply side of the price equation for homes, as we have seen those prices deteriorate from the top in 2006. Boomers, in the aggregate, did not have subprime loans; option ARM loans; or interest only loans with teaser rates scheduled for reset. However, what they have seen, is the nominal value of their homes increase dramatically, followed by the dramatic decline that has taken place since the top in 2006.
That decline is reflected in a more recent chart covering the much shorter time period between 1970-2010. It can be found at http://mysite.verizon.net/vzeqrguz/housingbubble/. And, while it reflects slightly differing numbers of $245,000 nominal, and $262,000, inflation-adjusted, at the top of the market in 2006, it also now reflects the deflation that has taken place in the average price for a home since the housing bubble burst, down to $175,000. That same chart also shows that the inflation-adjusted average price of a home between 1979 and 1999, a period of 20 years, has oscillated around $150,000. So, the question arises, do we see regression to the mean price, for that latter 20 year period, down to $150,000, inflation-adjusted, or to the former 45 year average in the former chart of $125,000?
What happens when the ‘wave’ of net selling by the Boomers commences, as they try to recoup some of the lost profits they had slip through their fingers as they saw the value of their homes go up and then back down as the housing bubble burst? What happens to the average inflation-adjusted price of a home when the Boomers collectively sell to downsize from a bigger house to a much smaller, more manageable one; or into an apartment; or into a retirement facility; or, move in to their grown children’s home to conserve cash?
The upcoming Boomer-related supply ‘wave’ will not bode well for any future upside in housing prices for multiple years to come. Moreover, the further reality is that credit has been damaged across the board in this great recession, and bank lending standards increased, such that they constitute barriers to entry to home ownership in the first instance, by those who otherwise would hope to own, despite the fact that they are likely financially better off renting. This new reality will be fatal to the demand side of the price equation for homes. Accordingly, all these factors will combine to create a virtual Sisyphean task for home price appreciation going forward.
© 2010 Riordan J. Zavala, Esq. All rights reserved.