10,000 baby boomers are retiring per day. This two decade trend has only started but will certainly have an impact on the housing situation moving forward. In most economic reports the boom and bust of the housing market was not factored into the equation. Many boomers will downsize or sell as they age. This is just a matter of demographics. While trends are harder to predict [7], we know that 10,000 baby boomers will be retiring on a daily basis for well over a decade. What does this do to housing? The challenge we will face is that the younger home buying generation is less affluent and more in debt prior to purchasing a home. Instead of growing households, we saw over 2 million young adults move back home to live with their parents. So much for household formation taking up all that excess demand. The recipe for the moment has been to constrain inventory [7] and artificially push rates [7] lower but this has done very little to increase actual financial security. What happens when millions of baby boomers retire?
Home ownership rate by cohort
The recent major Census report shows one clear thing. Home ownership is dominated by older Americans:
[8]
The big changes can be seen when looking at the trend from a much higher perspective:
1980 home ownership rate
15 to 24: 22.1%
25 to 34: 51.6%
65 years and older: 70.1%
2010 home ownership rate
15 to 24: 16.1%
25 to 34: 42%
65 years and older: 77.5%
The home ownership rate from those 15 to 24 and 25 to 34 has declined substantially over this time while the 65 year and older group has seen their home ownership rate increase. The good news is that nationwide home values have fallen dramatically yet in many large metro areas home prices are still inflated. Bubbles do not deflate uniformly.
The twin lost decades
People have a hard time imaging a lost decade for the US but we have just experienced that with housing and the stock market:
[9]
Both home values and stock values are back to levels last seen over a decade ago. Economists and financial analysts have built models with stock markets returning 7 percent almost on a continual basis. Yet for housing, Professor Shiller went back to the 1800s and found that housing prices essentially only kept track with inflation. Stocks? Do we have a long-term model where many multi-national corporations make money from their businesses abroad? Why can someone assume the stock market will return 7 percent after adjusting for inflation in a dynamically different world?
As baby boomers retire, their stock portfolios look very much like they did a decade ago (assuming they even saved and data [10] suggests very few even did). Most Americans have their wealth stored up in housing. And housing is still near a trough. Part of the low inventory also comes from many Americans unable to sell their homes because they are flat out underwater.
Underwater home owners
It should be clear that the bulk of home owners come from the older cohorts. Many of these are actually in negative equity positions:
[11]
11.4 million (23.7 percent) of homeowners are in a negative equity position. That is, you have a large segment of our home owning population that simply cannot sell without losing money, and this does not factor in the standard 5 to 6 percent selling costs. So many baby boomers [12] are simply staying put if they can. It was interesting but not surprising to read the following:
“(Bloomberg [13]) When Bank of America Corp. sent letters to 60,000 struggling homeowners offering to slice an average $150,000 off their loans, the lender got an unusual response from most of them: silence.”
So why would someone not respond to a $150,000 reduction on their mortgage? Well if you are in Nevada and bought a $500,000 home that will now carry a $350,000 mortgage but is worth $150,000 is this even worth your time? Can you even afford the lowered price? Many obviously cannot as indicated by the foreclosure rate. So the foreclosure pipeline is still healthy and full [14] yet leaked out inventory looks better because:
-1. Banks are selectively leaking out properties
-2. The 11.4 homeowners in negative equity keep supply low as well (many may like to sell but cannot)
-3. Household formation has slowed so less demand on more expensive homes (competition from echo boomers and boomers can be strong because of low inventory in some locations)
Yet the low inventory is more of a symptom of dysfunctional housing market. The baby boomer home selling trend is going to have a big impact. Much of the analysis we see assumes that the new home buying generation is basically going to replicate the trend that the boomers did. Why should we assume that? There are a few things that have changed after WWII:
-1. The massive stock bull market. After WWII with many industrial countries in ruin, the US had a major competitive advantage in nearly all economic sectors ushering in multi-decades of prosperity. Look at the stock market chart above. The world has become more competitive and wages for Americans have been stagnant for well over a decade. This is support for lower home prices not expensive home values.
-2. Home buying on one income. It was feasible for many blue collar one income households to purchase into the American Dream. That is now tougher for many and virtually impossible in expensive metro areas. Blue collar work has been on a major off shoring trend. In expensive markets you need two professional incomes just to buy a decent home.
-3. Global debt bubble. Never in our history has there been so much debt both at the government and individual level. We are living through a major de-leveraging event.
-4. Multiple jobs with little security. While many boomers had guaranteed job security with one company and many times pensions, many younger Americans will have multiple jobs/careers over a life time. Many are looking for mobility and many do not have home buying as part of their future plans (certainly not at levels like that of the boomers).
You have a wealthier generation that has seen their wealth decline trying to sell to a less affluent and smaller generation. Instead of household formation or even renting, over 2 million young Americans moved back home [15]. Is it any wonder why we have now faced a lost decade in housing [15]?
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