Feb272014

What happens if nobody buys the Baby Boomers’ houses?

As Baby Boomers retire, they may want to sell their McMansions and downsize. They may discover finding a buyer is more difficult than they currently imagine.

baby_boomers_housing_affordabilityI recently read Ayn Rand’s Atlas Shrugged, all 1,167 pages of it. The core idea of the book postulates what would happen if society’s productive people went on strike and refused to produce anything of value. Not to spoil the book, but if society’s most productive people went on strike, commerce would come to a halt, and society would devolve into barbarism. When I read today’s featured story on Baby Boomers, I wondered what would happen if succeeding generations simply decided not to buy their houses.

Who will fund the retirements of Baby Boomers? Since housing was touted as the best retirement savings vehicle, and since 25 years of falling interest rates inflated the resale values of these properties, Baby Boomers fully expect to sell their homes for a large sum to provide for their retirements. The housing bust frighted many seniors as their property values crumbled, but the successful market manipulations since have reflated the bubble and given many seniors hope.

Perhaps some seniors will foolishly take out reverse mortgages to fund their retirement despite the fact that reverse mortgages are a really, really bad idea; however, most hope to sell their homes and enjoy a generational transfer of wealth from those working today to those who want to retire. Workers will already pay a great deal to Baby Boomers through Social Security, but in addition to this burden, workers must pay inflated house prices to buy a Baby Boomer out of their overpriced homes — assuming today’s workers don’t rebel and chose to rent instead.retirement_savings

The Baby Boomer Housing Bust

Mary Meehan, Contributor, 2/21/2014 @ 12:14PM

Depending on whom you ask, there are between 8,000 and 10,000 Baby Boomers reaching age 65 every day in America. It’s around that 65th birthday (and for the ten or twenty years that follow it), that Baby Boomers will feel especially motivated to sell their house and move on out. …

Many Boomer families will simply downsize. Other soon-to-be retirees will go straight to some flavor of retirement living. A coming shift in how we all think about housing, though, is less about where this consumer cohort is headed. Because it’s the buildings Baby Boomers are trying to leave behind that will shape the face of American life.

The size of the Baby Boom generation made them a powerful political and economic force. If they do want to move out of their McMansions, they will need to sell those houses to some buyer from a new generation, the generation currently tapped out and eschewing home ownership in favor of renting.old_ponzis

Many Boomers bought their homes in the 80s and 90s, and a sustained real estate boom rewarded them time and again. Members of the first post-WWII generation parlayed the economic lucre of housing equity into bigger and bigger homes. According to Census data, house sizes increased decade after decade, before topping out at a whopping 2,521 average square feet in 2007. Our we’re-in-the-money, bigger-is-better mantra gave birth to, among other oversized things, the McMansions that now dot the suburbs.

Boomers had an unreal real estate run for decades. But it’s about to come to a hard stop. Social shifts and demographic forces (more than the ups or downs of any local housing markets) are poised to change Baby Boomers’ futures.

Demographics Grind Away

We all know how the economic landscape changed in 2008.

In large measure, leading up to that shift, Boomers didn’t save enough for retirement. For most of them, their home is their biggest asset. But many will need to sell their homes to finance their imminent post-work years. Most Boomers will want to, or need to, sell the big family homes they purchased years ago. And here’s the rub: There aren’t enough buyers to soak up the kind of housing inventory that downsizing Boomers will leave in their wake.

This fact will force Boomers to do one of two things: (1) sell for less than they want and potentially put too much supply on the market, or (2) spend several more years wandering around their empty McMansions. Realistically, most will stay put if they can’t sell for what they want, particularly here in California where Proposition 13 limits their mobility.

Ponzi_retirement

A Bipartisan Policy Center study took a gauge of housing demand in March 2012. Their findings? “Among and within metropolitan areas, dwellings released by an aging population are not likely to align with future demand. While most states and metropolitan areas have significant numbers of Baby Boomers, the distribution of young adults is more uneven.”

Not Buying It

If you’re a Boomer reading this, you might be thinking, Oh, maybe some Gen Xers will move on up and buy my house? Probably not. Most Gen Xers are already settled, many of the cohort (loosely defined as those born between 1961 and 1981) are plateauing in their careers, have been hardest hit by the economic downturn, and now have the financial stress of growing kids. Fellow Forbes contributor, Erik Carter, cited “a recent census report found that people between 35 and 44 saw a 59% decline in median household net worth between 2005 and 2010, the largest drop of all age groups.” That means little home equity, limited assets to put toward move-up down payments and a (grudging) stay-put attitude.

The move-up buyers Baby Boomers need are either unable or unwilling to make the sale, particularly the Ponzis who spent their move-up equity.Huge Mortgage

Millennials, though? They could buy? Maybe! They’re saddled with record debt, though–$1 trillion student load tab according to the Wall Street Journal and Experian–and they’re stuck in a flat job market. For 18-29 year-old wannabe workers, the effective unemployment rate is 15.9 percent.

Millennials also have a shifting set of attitudes around big-ticket purchases, as well as an evolving attitude toward ownership in general. Homeownership among 25- to 34-year-olds dropped more than any other age groups from 2006 through 2011. Millennials are the drivers of the $26 billion Sharing Economy. So to them, what does “owning” even mean anymore?

Millenials won’t save the Baby Boomers; most Millennials won’t qualify for a mortgage until 2019.

Radical Renovations
But the housing market is starting to look good again, right? In general, yes. But the economic realities (the job market’s grinding climb), demographic forces (retirement-age families with different sets of needs than they had 20 years ago) and social shifts (like shrinking family sizes) that we’ve outlined show how many current Boomer homeowners are poised to get squeezed.

It’s time for Boomers themselves to further flex with creative housing solutions like condo conversions, boarding house conversions, co-housing, shared purchase of an apartment buildings. If they can’t get out of their current homes, Boomers need to consider radical renovations — to their houses and to their ways of life — that will allow them to age in place, bring new people into their homes, and generally start to live a little differently.

Will Baby Boomers really be prevented from selling for the price they want at the time they want? Will many of them chose to keep their McMansions? If they are unable to sell under terms they deem acceptable, they will need to keep their homes. I doubt many Boomers see this coming.

disappointing_sale

[dfads params=’groups=3&limit=1&orderby=random’]

[listing mls=”PW13232269″]