Wednesday, December 15, 2010

The Next Housing Bubble - Is This the Perfect Storm?

In surfing the tubes that make up the internet (my apologies to the late Senator from Alaska), I happened upon this article from the Journal of the American Planning Association.  The article is entitled "Aging Baby Boomers and the Generational Housing Bubble".  It is a fascinating analysis of what could bring a fatal blow to the idea that our houses will form the bulk of our assets as those of us that are baby boomers enter our retirement years.  Unlike the short-term "temporary" meltdown in house prices created by the subprime mortgage issue of the past two years, this long-term demographic price correction could have a permanent impact on the housing market.  While this study is specific to the United States, its overall conclusions apply to any country in the world where a long-term surge in births was noted immediately after the end of World War II.

Traditionally, the generation that parented baby boomers has watched house prices rise, at times seemingly exponentially, and have sold their homes at prices that are often orders of magnitude more than what they paid for them decades earlier.  In large part, the sale of these assets has provided funds for their retirement years.  As baby boomers, we have learned this lesson (perhaps a bit too well) and have patterned much of our financial planning with a similar target in mind.  Sure saving money from our weekly paycheques is a good idea but it's hard work and requires discipline and, after all, we can count on using the equity we have in our homes to make up the difference between what we save and what we need to retire with very little effort on our part.  After all, house prices have nowhere to go but up....eventually.

This study by Dowell Myers, a professor at the Univeristy of Southern California School of Policy, Planning and Development and co-authored by SungHo Ryu studied the relationship between the 78 million baby boomers and the housing market and what effects aging baby boomers will have on the housing market in the United States as they retire, relocate, downsize and eventually leave the housing market.  The large numbers of this cohort has largely driven the real estate market since they first entered it in the early 1970s; burgeoning demand for homes drove prices and inventories ever higher seemingly unendingly, especially if one listens to real estate associations.

According to the study, sales of existing homes make up 85 percent of the homes sold today.  Senior citizens are by and large the suppliers to the housing market as they downsize, move into senior's residences or pass away.  Those over 65 years are proportionately more likely to own their own homes in comparison to younger adults so they are more likely to have houses to sell.  The first baby boomers are slated to reach their retirement years at the age of 65 in 2011 and the last will pass through the "gate" to seniorhood in 2029 so it seems likely that the effects of this demographic change on the real estate market will be seen sooner rather than later.  As well, a decrease in the number of younger, first-time home buyers means that the housing market will feel additional stress from shrinking demand at the same time as it faces rapidly growing supply.  This does not bode well for prices since the supply of available housing will be increasing at the same time as the demand for that housing is decreasing.

Here is a chart from the United States Census Bureau showing the projected changes to the demography of the United States over time for the years 2010, 2030 and 2050:

Notice how the bulge in the population age pyramid travels upwards particularly in the 2030 projection?  This indicates an overall aging of the population as the baby boomers reach their senior years.  Also note that for the 2030 projection, the number of people in the age groups under 45 years of age increases much less in proportion to those who are over 65.  From a housing perspective, that means that there are fewer people that will be entering the housing market than those who will be leaving.

Here's another chart showing what percentage of the population will be over 65 by state comparing the year 2000 to projections for the year 2010 and 2030:

Notice that the overall nationwide over 65 population only increases from 12.4 percent to 13 percent in 2010 because the baby boomers have not yet reached that age bracket.  The big change occurs after 2010 and the U.S. Census Bureau projects that the percentage of those over 65 will rise to 19.7 percent of the total population.  Some states will be more affected than others; Florida, Maine, Wyoming, New Mexico, Montana and North Dakota will each have more than one quarter of their populations being aged 65 and over.  That will have a major impact on their local housing markets.  Data from the Centres for Disease Control puts life expectancy at birth at 77.9 years in their latest study that examines all deaths in the United States for the year 2007.  This tells us that it is most likely that the baby boomers that reach the age of 65 in 2011 will most likely not be around by 2029 when the last of the boomers reach 65 years of age.  Those senior boomers who own houses in 2011 will in all likelihood not own homes by 2029 which is part of the supply problem.

Another factor that is affecting home ownership by the generation following the boomer generation is the  lack of affordability especially when one compares median house prices to median income level.  Dr. Myers gives the example of house prices in New Jersey where the median house price to median household income multiple rose from 2.89 in 2000 to 5.00 times the income of young adult households by the year 2005.  Some states showed much greater ratios of median home values to median incomes of household heads between the ages of 30 and 34, California, Hawaii, Nevada, New Jersey, Rhode Island and Massachusetts being particularly problematic in 2005.  There is no doubt that the recent decline in housing prices has improved affordability in these markets but houses are still unaffordable for many families that are in their prime home purchasing years.  For further information on housing affordability, I highly recommend the 6th Annual Demographia International Housing Affordability Study 2010 which shows which parts of the United States have the least affordable housing as measured by a multiple of median price to median income.

What is rather critical to Dr. Myers' thesis is the crossover point where selling of homes exceeds buying.  The problem will be most severe in states where the older population is large and sells their homes at a young age and where the population of young buyers is growing slowly or is stagnant.  From the study, it appears that the northeastern states are the ones where older homeowners sell in greater numbers than younger homeowners buy as shown in this chart:

Baby boomers were born over an 18 year period of time; it is likely that the housing sell-off (and accompanying price declines) that takes place will take far longer than a normal correction in the housing market, most particularly when compared to the price decline seen in the past 2 to 3 years.  The baby boomers born in the late 1950s and early 1960s are likely to suffer the greatest price drops since, by the time they are ready to sell their homes, the supply of real estate for sale will be approaching its peak.

Home equity forms a very important part in the retirement savings of many American households and real estate is more widely held as an financial asset by Americans than other asset.  While it is comforting to think that the equity that we have built up in our homes is the key to a secure retirement, shifts in the demography of nations in Europe, the South Pacific and North America may prove that paradigm to be a fallacy.


  1. Very interesting article. I am particularly interested in the statistics for median household prices versus median household incomes.
    Do you think a similar dynamic could occur with stocks as baby boomers, supposedly, start to cash in stocks for bonds and "less risky" investments?
    Don Levit

  2. Definitely some interesting numbers, both what was expected and predicted. You definitely have some good analytical skills, thanks for sharing!

    Become a Facebook fan for discounts on Baby Boomer gadgets and more

  3. Thanks Don. Yes, I suspect that your suggestion that stocks could be a casualty of the demographic shift is correct. Boomers, myself included, are already looking to moderate the risks in our portfolio particularly after the 2008 - 2009 experience. We'll be looking to reduce the risk of losing our capital and, in part, that's why I think that as people pile into bonds, the prices will be pushed up and the bubble in the bond market may not be as severe as some analysts propose.

    But then again, who really knows!

  4. A political Junkie:
    I am thinking of moving a good portion of my money out of the stock market into indexed annuities.
    If the S&P rises, you capture a portion of the gain.
    If it falls, you lose zero, and start from a lower base the next year.
    You also are guaranteed a 3% return.
    Any one have experiences with these products before?
    Seems to me a pretty good fit, for I believe the stock market is going to go up and down like a yo yo.
    Don Levit

  5. Sorry Don, I don't know anything about indexed annuities. I agree about the yo-yoing market and am taking some profits where I've had a return that I'm happy with.

  6. Interesting comparisons of various levels of ages, etc. of humans available to buy/sell houses.

    I would like some genuinely knowledgeable economists/experts (if such an oxymoron exists) to explain one overriding factor to me. I have always felt that with population constantly increasing, housing creation must constantly meet the demand for the net increase in people who will actually use (live in) those properties. Housing additions to the overall inventory would have to match population increase needs, plus replacements of homes disposed of by simply tearing down or fire or any other reduction in the properties.
    Is this not true?
    I guess this assumption could be wrong, but I feel housing "shortages" and "bubbles" are primarily a supply/demand thing caused by overbuilding compared to the need for net increase in housing inventory, or underbuilding in periods such as the current situation where real estate has completely lost it's luster.
    Can anyone out there explain to me why or why not this assumption is correct?

  7. Anonymous:
    My perspective is that there are financial limits of the demand/supply function, due to affordability.
    For example, I have read material (I may not have kept it), which documented the median price of homes versus median household incomes.
    Back in the 1950s, the median household income for the year covered the median price for the home.
    This dynamic became more expensive, as today we are looking at median household income of $50,000 versus a media priced home of $150,000, or a 3 to 1 ratio.
    That considers many households have 2 incomes as opposed to one in the 1950s, and fewer kids per household today versus the 1950s.
    With group family health premiums around $13,000 per year, that's almost like a second mortgage payment in and of itself.
    Don Levit

  8. I just read this blog for the first time, and am thoroughly impressed. Your analysis hits on a number of key variables, and touches on the baby boomers destruction of their own retirement through their refusal to address income disparity. Have you written on income disparity?

  9. Thanks. No I haven't written on income disparity but am willing to look into it. By income disparity, do you mean the changes in income from working life to retired life?

    My next posting on baby boomer impact on the economy will give my impressions of what I think will happen to both the stock market and the bond market as boomers reduce risk in their portfolios - time permitting of course.

  10. I think your analysis fails to address an important issue regarding the overall population. I agree that the average age of the population is increasing and the Boomers will undoubtedly be moving out of their homes over the next few decades. However, the the census bureau graph clearly indicates the overall population will continue to increase for every age group in the upcoming decades. Your analysis makes it sound as if there will be a huge glut of homes; more homes than there are people to live in them. This is simply not the case according to the chart. If Americans were to build no new houses over the upcoming decades, there would be an epic housing shortage. Clearly, building will be required to keep up with demand. This makes it unlikely that any sort of long term market downturn will occur.

  11. And what about inheritance? I remember hearing a stat that an amount of 50 trillion or so will be passed on when the boommers do. I always assumed this is housing, balences, pensions, and investments. This number is down from 70 trillion pre 2008. I feel this is an important

  12. You think this is bad, just look at China in the years to come...their crusade for one child will, in the end, create an elderly population shift that will really create a burden to them...

  13. Since we're discussing real estate, I think it's important to discuss the three most important factors impacting real estate's value....location,location,and location.

  14. What about the children of the dying baby boomers who will inherit money - and guess what is the first thing they will buy?

  15. Does this mean investing in Elderlyhomes will fetch returns or time shares on those properties? ? The assumption that elderly baby boomers with downsize their homes is as flawed as "the prices of home always go up" .

  16. I agree with Steve above. You are looking at the second order effect. The first order effect is that the number of homeowners will increase. Who cares if the number of non-homeowners increases also? Or that they are increasing more rapidly than the homeowners? What should be measured is the increase in homeowners (demand) against increase in number of homes (supply).

    Besides, older people still have to live somewhere -- not all of them will be in assisted living or nursing homes. Some will be in apartments (higher rents) or living with their children (increased demand for larger homes).

  17. It doesn't really seem like you account for immigration. Sure Americans that currently live here aren't having the amount of children they once were but America will continue to be a desirable place for people to move to. I have a feeling population growth will continue for many years to come.

  18. A key contributor to GDP growth is population growth, which is declining in many areas, and negative in some such as Japan. Population is expected to peak at 9 billion.

    However, new homes won't be built unless prices are high enough to make them profitable, which will constrict supply from new construction.

  19. Elder baby boomers have to live somewhere. Once the house is paid off, why not stay living there. I know, they need to cash out to have money to live on. Once houses are paid for, you can live very cheaply on social security alone.

    I plan on staying put in my existing house in old age. My kids can inherit the equity.

  20. So many people forget just what the impact of immigration is to our country. Throughout our history, immigrants have fueled our economy from creating a larger tax base to increasing demand for all things American, housing including.
    I am not Hispanic, but I see the coming wave of their influence in our country. As a senior citizen, I welcome it. They will fund social security, pay taxes, and help sustain the housing market. They are generally family oriented, work hard, and have the same dreams Americans have always had. Our immigration problem MUST be solved. Stick-in-muds that are so against immigration reform are only delaying the inevitable and jeopardizing the best interests of the American people.

  21. Good analysis except you missed a very important point. You wrote: "While this study is specific to the United States, its overall conclusions apply to any country in the world where a long-term surge in births was noted immediately after the end of World War II." This implies that it was the "surge in births" that formed the baby boom that created the problem. In fact, it was the dearth in births in the next generation, the one which the baby boomers should have parented but didn't. In the U.S., the fertility rate has been below replacement levels for women born in the U.S. to parents born in the U.S. since 1973. Only immigration and higher fertility among immigrant women and first generation American women has kept the replacement population from falling off a cliff. The baby boom was really just a return to fertility levels around the turn of the 20th century, before WWI, the Great Depression and WWII had artificially suppressed them.

    In other words, the looming economic tsunami is of the baby boom's own making. We didn't invest in the next generation and so the next generation is too small to fund our retirement. Oops. But it's too late now. We'll have to live with the consequences of our short-sighted, live-for-today way of life.

  22. 2 words, Reverse Mortgages.

  23. Reverse mortgages will offer very limited help, since most already have little equity to borrow against. Eventhough we're only in the early stages of this generational slide in prices, about a quarter of American homeowners are already underwater. Besides, I believe reverse lenders only lend up to 40% of any equity (and at much higher rates). I expect they will tighten those requirements as home prices trend down over the next two decades.

  24. A very interesting analysis, but I think you need to make an adjustment in your projections where you say,
    "Data from the CDC puts life expectancy at birth at 77.9 years... This tells us that it is most likely that the baby boomers that reach the age of 65 in 2011 will most likely not be around by 2029 when the last of the boomers reach 65 years of age."

    Upon reaching the age of 65, an individual in the US has a life expectancy of another ~18.5 years, thus reaching the average age of 83.5 or about 6 years longer than the projection from birth (having avoided all the causes of death between birth and 65.)

    You may want to consider revising your statement to be:

    This tells us that it is most likely that half of the baby boomers reaching the age of 65 in 2011 will most likely still be around by 2029 when the last of the boomers reach 65 years of age.

  25. All kinds of shifts are taking place. You mention the age and income demographics. These shifts are going to drive home design innovations and shift trends away from gaudy mcmansions.
    I forsee space efficient, low energy consuming houses being what people want moving forward.
    The 3500sq foot inefficient, gaudy, mcmansions are going to be dinosaurs much like the small 50's blue collar houses were dinosaurs in the 70's and on.
    Outside of the cream of the mcmansion crop in terms of design and location. These segment is never going to recover IMO.

  26. This is strange as for example in Finland we have similar age pyramid, lot's of private household dept but housing prices have just gone up and up. Even last year 2010...!! They are now all time high and people are borrowing more and more. Really no housing price problems in Finland, people pay more than seller asks.

    Maybe reason is that there is just one large city Helsinki area and government pushes people to move there from other areas, so that there will not appear price dip until all people have moved there homes to same city.

    It's maybe 2030, when so called finnish baby boomers are gone - and all younger people live in capital city. Crash. Bad crash then.

  27. House price index in Finland, it's wonderful

  28. Another solution that has worked very well for us so far is creating small-scale wars in order to fuel immigration from countries with desirable populations. For example, we instigated war in Bosnia, which resulted in 250,000 war refugees to US in 1990s. They were white, secular, hardworking people that immediately purchased homes, cars and our lifestyle. If we continue fueling such wars (which is very inexpensive and doesn't include any military expenditure on our part), our situation will be solved. Cheers!

  29. Canada has their share of vacated towns. Been going on since the 50's...

  30. Is it possible that larger homes will decrease in price as boomers sell, but starter homes, townhomes increase in prices as boomers compete with first time home buyers and the new normal of lower paid non college educated households?

    A similar analogy would be when $4 a gallon gas caused SUV's to quickly depreciate in value but small fuel efficient cars went for a premium.

  31. That seems a little paranoid, don't you think?

  32. Paranoid? Who really knows? I guess the best advice is to save actual dollars (when you can) for your retirement and use whatever value is stored in your home as icing on the cake rather than the other way around.

  33. I have pondered this affect before as well, am interested to read the full study. I also wonder what the affect of a work force shortage will be with retirement of the boomers? Living in Alberta Canada, we saw a constant shortage of workers during the boom years which spiralled wages up and up....driving house prices up and up. Will it all come out a wash? I have revenue property and so long as it keeps paying me inflation adjusted rent I'll be happy no matter what the value of the property....though my kids will be happier if my estate includes includes some decently valued property. Also, as always, don't put all your eggs in one basket, I keep rougly equal Market investments as well....who know's if it'll work in the end, fingers are crossed!

  34. Great analysis as far as it goes. As a couple of commentors have alluded to immigration and migration can be big factors in the market locally and even nationally. The question is whether there will there be sufficent numbers in the lower age groups to fuel demand in a particular city.

    You are to be applauded for putting this much effort and getting good discussion.

  35. Thanks beeonline. At least it will get people thinking about real estate as an investment in a different way.

  36. As they told me some 30 or so years back, CPP wouldn't be enough, people don't plan to fail, they fail to plan.
    Pay yourself first, from the start or at every opportunity you can and you know, that guy was right.

    Pay no finance charges as well. No credit card fees, pay up asap. Make it you objective, then you find yourself with a say the cash in a real 'decent' vehicle buying situation. Saves Ks on the spot and the one third of monthy payments for the next six years of payments.

    Great site, look forward to more.

  37. PJ

    Nice article. Another element that I think about is catastrophic health events. I believe that if a spouse has a catastrophic health event it can ruin the finances to a very large extent of a married couple. However I believe that the house cannot be touched thereby sheltering assets. This is a valid reason for NOT selling out of real estate and going into liquid investments.



  38. You make a lot of assumptions in your article. Firstly, there is the assumption that as soon as they pass the age 65 signpost, boomers will dump their houses. You also state that those senior boomers who own their houses in 2010 will in all likelihood not own homes in 2029: where do you get this from? All around me elderly people are living in their own houses until they pass on, so your statement is quite an assumption, and you don't give data to back it up. Thirdly, as Steve points out, note from the chart provided that, while PROPORTIONS of age groups are expected to shift over the coming decades, the TOTAL number of younger people is ever-increasing, as are the totals in most age groups. Immigration is a flexible number, as is the amount of construction that may occur to replace homes or accommodate the population increase. Lastly (though much more analysis could be done), states/provinces that have disproportionate numbers of the elderly now are probably the ones that will benefit MOST from shifting demographics, as these are the places most retiring boomers are likely to continue to wish to move to, or buy second properties in: Florida, Arizona, etc. A lot of people have "bought high" in the past from trying to wait for the predicted "big pop" that really never happens, and history shows over time continual appreciation. Buy the current National Geographic, which talks about the global population going from 6, to 7, and before long, 9 BILLION and ask yourself again what the long term value of real estate will be.

  39. A very good effort, indeed, PJ!

    Here in UK, the Office of National Statistics, the official government body, seems to confirm your basic assumption about boomers' retirement.

    What's more noteworthy is the fact that, in UK, this phenomenon does not peak till mid 30s. There will be a million of boomers aged 88 or over.

    Intriguingly, the biggest age group behind boomers in terms of numbers will peak at exactly the same time i.e. the generation born in and around 2007-8-9 will peak exactly at the same time. No prizes for guessing.. at around a million mark.

    Yes, migration, location location location, and any other event could skew the finding any which way - no one knows what future holds - but no one can argue against the basic gist of analysis.

    Great work!

    Look forward to your work on bonds.

  40. @Anon "What about the children of the dying baby boomers who will inherit money - and guess what is the first thing they will buy?"

    Uhm, yeah except if you look at the cut the government now feel entitled to steal from the newly deceased, there won't be much left for the beneficiaries to buy much.

  41. An interesting article but one that is still hypothetical. It has not taken into account many variables.

    Many of the elderly are reluctant to sell their home that they may have been in for a long time.
    Many have pensions that easily pay their way so they are not 'forced' to sell.
    The elderly are living longer.
    By 2025 the worlds economies may have re-balanced and economies may be more settled, aiding house purchases.
    Properties may be passed down through the family.

    There are many other reasons that counter this article. Then again it may just happen.

  42. This is just a hypothetical scenario but, at the very least, it gives us something to ponder. It also makes one realize that saving for retirement where possible is a good form of insurance if this scenario does unfold.

  43. Has anyone looked into the future effects of property taxes on house prices? As Corp tax collection goes down and down local governments have one fixed source of revenue to help deal with the exploding cost of elder care.

    And if you think immigrants are going to want to move into retirement communities with no jobs you've got a lot yet to learn

  44. Alan ( 22, 2011 at 12:14 AM

    Hi, thanks for an interesting piece. I am a foreigner who is thinking of investing in US residential real estate. I know capital gains are out of the question for years to come - but the returns in many places are so high, who cares? I could keep taking the rent for years to come .. what do you think? Has anyone done an analysis on the impact on rents of the market downturn?

    1. Most recessions cause minimal shifts in rent. This one is causing an increase in rent due to people leaving (being forced out) foreclosed homes. However, rents like house prices will eventually be subject to what people can pay. As wages are decreasing, housing prices and eventually rents are likely to follow. During the Great Depression rents fell ~40% while house prices fell about 31%.

  45. This is just a hypothetical scenario but, at the very least, it gives us something to ponder.

  46. Then we must add to your analysis interest rates, replacement cost, efficiency if energy cost explode, land values, and changes in life styles. This will take place as we all face the new "normal" whatever that comes to be.

    Some of this is covered in my book "Advancing Time" available free online. One statement you can count on is that the future will be interesting and supply no shortages of challenges.

  47. It is simple: supply and demand. There are 78 million boomers, and only 38 million Generation X'ers (who are the children of the smaller generation prior to the "boomers)". There are not enough of them to buy the McMansions, pay for social security, etc. They are the gap between the Y generation, which is the children of the boomers - over 80 million and counting. But this generation is being hit the hardest with no jobs. College grads are working at minimum wage jobs. This will be the first generation that will not have greater economic wealth than the prior. A first for the United States.

  48. MY Bro before had one he has 4 plus a his old age he likes to travel to his diff. homes,old boomers are spending...pj come on over to the right side of the track :)

  49. I'm paying off my place. The amount of money I'll save by doing that and staying in my house in future costs less than three times what it would cost me to buy an annuity and rent. I think a lot of boomers, if they're smart will do the same. When you crunch the numbers and consider inflation, paying off your house and staying in it is probably the best investment you can make. Housing is always your number one expense, retired or not.

  50. @Anon "What about the children of the dying baby boomers who will inherit money - and guess what is the first thing they will buy?"

    If you are implying it would be a house, I doubt it. A 55-year-old inheriting money and a house from an 80 year old parent probably already owns a house and would sell the extra one. If the inheritor doesn't already own a house, it's probably because he or she doesn't want to.

  51. Interesting read. As mentioned by others, if you look at the age chart, almost all age groups are LARGER in the future.

    I do think the nature of housing will evolve in the coming decades -- smaller homes near city centers, more condo, "active adult" communities. There will still be markets for the 4 or 5 bedroom homes where multi-generational families will want to live, even as families will have fewer children.

    I think affordability issues will have more of an impact than aging baby boomers. With Vancouver as an example, even though a west-side "crack shack" is over a million dollars, more affordable housing can be found further out. Whereas oldest baby boomers bought a single family house as a starter home, the more recent generations have or will buy a condo or townhouse to start. Only the relatively wealthy will have that west side house with a view but the middle class will still be able to afford that small rancher or townhouse in Surrey.

  52. reverse mortgages can be a great tool for some seniors in retirement

  53. Sobering article. I suspect that the vast and entrenched real estate (and banking) industries don't want us to know these things. Shush!

    Now - from the corrections desk:

    The phrase "have sold their homes at prices that are often orders of magnitude more than what they paid for them" needs revision -

    I don't think "orders of magnitude" is the term you mean to use here (unless you bought your home for one dollar). Order of magnitude is a scientific term, a mathematical exponent - specifically the powers of ten. So one order of magnitude is ten raised to one = 10; two orders is ten raised to 2 = 100; three orders is ten raised to three = 1000, etc. "Multiples of what they originally paid for" is probably more appropriate.

  54. I plan on staying put in my existing house in old age. My kids can inherit the equity.
    Pensions Advisory Service

  55. Dated article....prices are up how much from that 2010 bottom? Around me it's about 35%. Whoops, nevermind.