The Last Laugh in Demographics - Why Baby Boomers won’t buy your house
Chuck Ponzi December 12th, 2005
Time and again, in Southern California, we have heard the mantra that strong housing fundamentals are supported by demographic shifts related to Baby Boomers retiring and purchase of second homes, etc. etc. etc.
Although this is old news, Merrill Lynch’s North American Economist, David Rosenberg recently stated that “The demographic story behind the housing market boom, as we always thought, was a giant hoax.”
Lehman Brothers has weighed in with “(A) turn in the housing market is central to our economic forecast.”
Goldman Sachs has even said that a downturn in housing could shed 1.3 Million Jobs, increasing the unemployment rate by 1 percent in the US, and by 2 percent in California. These numbers do not include cuts in housing dependant businesses.
This sounds eerily familiar to the post I made back on April 7th, 2005 in my Jobs, Jobs, Jobs, Recovery to Crash Post where I predicted a 1% increase in unemployment and a 2.5Times multiplier (Not sure if my multiplier will hold up under intense scrutiny, there is a difficult link there to be made) Perhaps the guys over at Goldman are secretly reading my blog? OK, that would be a bit much… I think my head has swelled a bit much.
A great little story came our way from the good folks over at NPR in Boston. I like to listen to NPR every once in a while. Not really an unbiased news source, but they try their best. In their recent “Report from the Homefront” which you can listen to here, the discussion turned to how Boomers will be Decreasing, not increasing their purchases of homes, and living in smaller, not larger homes.
Most housing advocates have been spouting the party line that housing will only get more and more expensive as boomers hoard more and more housing unto themselves. I know firsthand through my parents (who are early boomers) that their taste for housing has changed over the years. In my lifetime, my parents have owned essentially 4 homes. Their first was a starter home that was about 1700 sq ft that housed them and 5 children. It was purchased in about 1974. Their second home was 5000 sq ft to house them and 7 children which was built in 1980. Their third home was 3500 sq ft to house them and 3 children purchased in 1991, and finally their final home was 2900 sq ft to house them and 1 child (my little brother moved out a few months ago, long overdue) purchased in 2002.
What surprised me the most was how much bad luck they had had in the last few purchases/sales of homes. They had always seemed to buy at the peak. At each step, they were making life changes with their peers. Is it possible that the past 3 or so housing booms have coincided with Boomers’ life shifts? If my parents are any indication, they have inhabited smaller (yet nicer) homes as time has gone by over the past 20 years. Will the boomers move to super low maintenance luxury condos? Maybe next time if my parents are any indication of what is to come. Perhaps when my father can or will no longer do yard work and the such.
So, the central argument is that boomers will be buying more and more homes to do less and less with them. The people over at NPR seem to be thinking so.
But, Rosenberg’s comment about a “giant hoax” was based on household formation. Household formation has decreased over time (and yes, households are a direct correlation with how many housing units are needed). So, who is buying all of the inventory? If my parents are any indication, it is indeed Baby Boomers. Not for living in, of course, but because my parents needed 25-35% returns yearly to be able to retire. So, if there is massive building without household formation, what would this be called? You got it, a great big speculative bubble. What will happen when investment money needs to be returned? That’s another simple one. Excessive supply will flood the market, and only when holding costs exceed ability to pay, will prices begin to come down. My parents have considerable reserves to handle holding costs, but a low tolerance for losses; as they require the capital and return for living expenses. In addition, since they are already retired, there is no additional income to repay losses from investments.
Will baby boomers be buying your home from you? Not likely. Their tastes, needs, and wants are all different from other age groups. If heating/cooling costs rise substantially, they will not want enormous entries, 12 ft ceilings, or backyard pools. After all, energy costs are not built into CPI which drive Social Security and Pension benefits. Perhaps a smaller place with lower upkeep but nicer amenities might be in the cards; but only if they can sell their spec home to you.
Gotta disagree. According to the Bureau of the Census, the share of U.S. households that own homes rose from about 64 percent in 1990 to almost 68 percent in 2003 even as the population grew substantially. Because of rising incomes, lower interest rates, and increased rates of household formation, more people have chosen to buy homes rather than to rent, increasing the value of mortgages outstanding. Your parents, while not unusual, were/are part of a population bulge but one spead out over quarter century 1946-1960. They/we were forming households and having children while the tail end was still being born. Your parents are atypical however if they need 25-35% returns yearly to be able to retire. Maybe you meant something else.
While I share your gloomy (read realistic) outlook and macro analysis I don’t think you hit the target with your demographics assumptions or anecdote.
Hi Robert,
I’m basing my information on Goldman Sachs’ research. I couldn’t find the link to the actual report, just a business week article that quoted it. Here is the article from:
http://tinyurl.com/b8v5m
Sara Aronchick, an economist with Goldman, Sachs & Co., released an interesting report late Wednesday that takes on the notion–popular among housing bulls–that the housing boom can continue thanks to favorable demographics. She notes that household formation – the growth rate in the number of households — has slowed sharply in the last 30 years, to an annual average of only 1% over the last five years. That’s down from 1.5% in the 1990s, and down from 2.5% in the late 1970s.
One reason is the reduced growth in the 20- to 29-year-old population, but the changing composition of immigration could be another problem…
Some housing bulls have argued that immigration will ultimately be the salvation of the housing market. But Aronchick is a bit dubious. She notes that there’s been a slowdown in immigration following Sept. 11: In 2002 and 2003, an average of 1.1 million immigrants entered–36% less than in 2000.
But she also notes that there’s a change in the composition of new immigrants that is dampening household formation. She writes:
“The share of unauthorized immigrants grew to 46% in 2004 from 36% in 1990. Moreover, among legal immigrants, an increasing number are family members. In 2004, slightly less than half of all immigrants had family members that were US citizens. Unauthorized migrants as well as family members would be expected to live with family or community already in the country–at least at first–rather than form new households.”
She acknowledges that some experts believe that immigration could begin to pick back in the coming year. But still, she concludes, “the composition of immigrants and the lag between time of entry and new household formation suggests that the demographic underpinnings of the housing boom will remain relatively weak in the near term.”
What I’m also alluding to is that there isn’t really a housing shortage. There is an overemphasis on ownership, which you correctly pointed out. My parents have either been terribly lucky with home buying or far too many coincidences have happened at each sale. I wonder how much the last 3 housing booms (at least in SoCal) were coincided with the United States’ largest demographic boom’s major life changes (or anticipation of). (Marriage, Starter Family, Increased Family, Dwindling Family, Empty Nesters). And, if this could perhaps predict the next step 10 or 15 years out when Boomers move out of their homes into managed care facilities, we might be on our way to the next financial move.
Manias always have some sort of fundamental basis; if the perception of home purchases coinciding with demographic shifts were blown out of proportion, it might explain more about how the idea formed of a demographic explosion when there wasn’t really one.
“will baby boomers be buying your home from you? Not likely. Their tastes, needs, and wants are all different from other age groups.”
This is so true! Now, to add fuel to the old fire of hating baby boomers lifestyle ( a discussion I picked up from another blog) how do you see this:
A couple I know bought a small house/townhome in OC (CA) WAAAAAAY, smaller than their old house in Culver City. They made a small profit in the change about six/seven years ago. This happened when he retired. Now she has retired, and what do they do? Although they have no savings except for her annuity, they decide to put ALL her annuity money in a tiny appartment in ski town in Southern FRANCE!!!OooooH LA LA! It costs them about 5,000.00 just to get there, since it’s nine hours away from Paris so you need to take another plane, and the place is not even an appartment, more like a bunker to change clothes between ski outings. Tres Chic!
What do you make of that?