As Baby Boomers downsize, an unprecedented generational unloading of houses looms on the horizon.
Is this one more sign the cycle of wealth accumulation is turning?
The following article was originally published in “What I Learned This Week” on April 18, 2019. To learn more about 13D’s investment research, please visit our website.
Baby Boomers are downsizing, but few Millennials want their homes, especially if they’re big and outdated. According to a recent report by Fannie Mae, “homeownership demand from younger generations is insufficient to fill the void left by multitudes of departing older owners.”
Collectively, the vast inventory of homes owned by older Americans is worth an estimated $13.5 trillion, “equivalent in value to nearly three-quarters of the nation’s annual economic output,” according to Fannie Mae. But as Boomers downsize, or exit the market all together, this economic value is shrinking. Homes in the U.S. built before 2012 are selling at deep discounts, sometimes as much as 50%. This problem will get worse in the 2020s as baby boomers — who own 32 million homes and represent two of every five homeowners — exit home ownership and downsize. Fannie’s study estimates between 2026 and 2036, 13.1 million to 14.6 million Baby Boomers will end their home ownership status — a 42% increase over the number of older homeowners who exited during the last 10 years.
This is going to have massive investment implications. One likely outcome is a glut of housing in markets across the country, especially in the Sun Belt, where wealthy retirees poured millions into spacious homes on a wave of easy credit. In the area around Scottsdale, Ariz., for instance, 349 homes were sitting on the market at or above $3 million as of February 1 — a record high, according to a Walt Danley Realty report.
Other possible outcomes: huge capital losses for the boomer generation in what is probably their greatest single asset, and the creation of new suburban lifestyles by Millennials. As the FT’s Rana Foroohar recently noted: “For the last four decades, wealth has moved from poor to rich, and young to old. Now, it’s going the other way. Massive portfolio shifts will be called for (hint: blue-chips could become the new subprime).”
We quote Candace Taylor reporting for the WSJ:
“Tastes — and access to credit — have shifted dramatically since the 2000s. These days, buyers of all ages eschew the large, ornate houses built in those years in favor of smaller, more-modern looking alternatives, and prefer walkable areas to living miles from retail.”
Millennials are a driving force behind the urban-suburban trend. Despite Millennials’ urban reputation, 50% of them live in suburban areas. Census data, as analyzed by the website 538, shows that not only are people aged 25 to 29 about 25% more likely to move to a suburb than city, but that 30 to 44 year olds are leaving cities for suburbs at a much faster pace than they did in the 1990s. According to Brookings, 2012 was the peak of the “back to the city” movement. The National Association of Realtors sees the same trend, with young buyers shifting to suburban locations.
And, after years of renting, Millennials are finally buying homes. Today the median age of a first-time home buyer is 32. Home ownership rates among Millennials are still low compared to previous generations. But this age group has increased the most since 2015 and surveys suggest they still view home buying as a long-term goal. Nationwide Mortgage reports that more than half of Millennials expect to buy a home within the next five years.
But Millennial buyers want a different suburbia than the ones their parents bought into. Community and convenience are key. Millennials may be priced out of major cities, but they still crave that city experience. We quote James McKellar, director of the real estate and infrastructure program at York University’s Schulich School of Business:
“Millennials have much less of an attraction to owning a single-family home and a car. They’ve got much more of an attraction to a lifestyle and a job. And many of them, especially in the United States, have become skeptical of this notion of a house as an investment.
Millennials and the subset before them, the late 30-somethings, are probably the first generation of people who are living their early adult life in urban centres. For them, home has more to do with being part of a complete community than it did in their parents’ generation, when it was about having a backyard, a picket fence and a two-car garage.”
Speaking to The Star, Canada’s largest online news site, McKellar said he believes that the very notion of home ownership is changing, and that young buyers are prioritizing quality over quantity. According to a recent survey by realtor.com, nearly half of home buyers this spring say they’re looking for homes priced at or under $200,000, the segment of the housing market that has seen the largest year-over-year declines in inventory. On the other hand, only 6% of spring shoppers say they’re looking for a home at or above $750,000, the price range that has seen the largest increase in inventories since last year, according to the study.
With several mega-trends at play, including demographics, urbanization, and micromobility, some communities are already shifting gears. So are savvy developers who envision a future suburbia that’s less about cul-de-sacs and strip malls, and more about urban villages with walkable streets and public spaces.
We end on this quote from Evan Roberts, a real estate agent with Dependable Homebuyers in Baltimore:
“In the past few years home prices in the cities have risen due to a lack of supply… We’ve seen those communities transform their design plans to better mimic the conveniences of living in the city…
Traditional residential neighborhoods have started rezoning portions of their land to light commercial. We’re seeing small restaurants and community shopping centers popping up to serve surrounding neighborhoods. We believe that as Baby Boomers leave the housing market these communities will reinvent themselves in order to attract Millennials.”
This article was originally published in “What I Learned This Week” on April 18, 2019. To subscribe to our weekly newsletter, visit 13D.com or find us on Twitter @WhatILearnedTW.
