There has been much speculation that single-family housing prices could take a hit as increasing numbers of baby boomers downsize and leave larger homes behind as they move into retirement age. That assumption is too general to be entirely accurate, according a pair of major economic papers on the topic of aging and property prices.
What is clear is that this ongoing population shift holds important ramifications for the multifamily property sector, including senior and assisted living facilities. And it is also becoming an issue of increasing importance for commercial real estate
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"As Baby Boomers enter retirement age, many 'empty nesters' may downsize, leaving their current homes in favor of smaller condos or age-restricted communities. Therefore, prices for large single-family homes located in high property tax areas could be under pressure over the next decade," Tim Wang, senior vice president and head of investment research for Clarion Partners in New York, told CoStar News. "However, seniors today are often healthier and live longer; because of this we believe it is still premature to invest in assisted living or nursing homes."
"In terms of locations, we do not expect all seniors to relocate to Sun Belt cities. In fact, many seniors prefer to live near their children and grandchildren and to remain close to their lifelong friends," Wang said.
John Rosenfeld, general counsel for Oxford Investment Partners in Phoenix, said that shifting single-family dynamic of baby boomers has been disrupted by the Great Recession and that has already helped boost the multifamily sector.
"Despite the popularity of various retirement investment vehicles, the largest part of most baby boomers' nest egg is still their homes. Converting those real estate nest eggs into retirement cash could pose the prospect of a "correction" as the baby boomers become a sellers' demographic," according to Rosenfeld.
"The timing and severity of the Great Recession has interrupted this dynamic," Rosenfeld said. "First, home devaluations of 30% or more over the past five years have depleted home equity, making it undesirable-even infeasible-to sell in the current market. We've seen this cause some retirees to describe themselves as "stuck" in their homes."
"What this has done is temporarily push back the onset of the disposition trend for baby boomers and made that trend more dependent upon the dynamics of the residential market than the age of the boomers," Rosenfeld said.
"A second effect is more lingering," Rosenfeld continued. "The Great Recession has caused many baby boomers to rethink their retirement plans. Boomers not only lost significant home equity, but also had to dip into more liquid retirement savings. Many baby boomers suffered layoffs and significant reductions in household income during what should have been their prime earning years. The downturn has flattened and skewed the earnings curve for many boomers, causing them to push back their retirement date or ratchet down their expectations."
"So boomers may be inclined to stay in their family homes for longer since they will be working longer. This could elongate the residential disposition timeline for the boomer generation overall, but result in a better fit with absorption," he said.
"Third, the Great Recession has caused an uptick in the residential rental market. This may have a mixed effect on housing values as baby boomers enter retirement. Today many people are not only renters of necessity, but by choice. That's a reversal of a mindset that dates back to the early 20th Century, if not before," Rosenfeld said. "The improved rental market may also provide opportunities for boomers to down-size without being forced to sell their family homes."
Sandra Ware, director and a member of the land practice group of Newmark Grubb Knight Frank in Wilmington, DE, sees the same phenomenon at work.
"What we are facing is a Lost Generation of homeowners, who would normally be buying the larger homes that the baby boomers are selling (or try to sell)," Ware told CoStar. "Now we have a gentrified group of new baby boomers who worked hard for what they have and are suddenly facing the untenable situation of staying put in their 'empty nest' homes, without being able to tap the hard earned equity that would have contributed to an easier lifestyle."
"The underwater homeowners must stay put, must continue to work to keep what they have, and worse, cannot afford any health issues, as the cash reserve cushions are no longer available," Ware said. "It is a truly scary situation for those experiencing it. Estimates are over 19 million people are in the same situation, with no solution in sight."
"As far as senior living home prices, and retirement communities, these prices have been frozen in time as there are less and less qualified buyers, less people in the market without homes to sell , and all the while the safety cushion of retirement is 'plugged up,'" Ware said.
What About the Echo Boomers?
Between 1945 and 1964 a total of 76 million to 79 million people were born. Now the children of the baby boomers qualify as an even larger demographic group. From roughly 1980 to 2000, 80 million or so echo boomers -- Generation Y, Generation X, Generation Next, or whatever you want to call it - were born.
Scott Ostlund, principal and president of Ostlund Equities, which owns and rents single-family homes in throughout Nevada, Arizona and California, foresees demand for properties being shed by downsizing baby boomers being fueled by the echo boomer home buyers. As a result he claims the impact on single-family housing prices will be minimal or could even continue to drive property prices. Ostlund is also principal and senior vice president of Lee & Associates in Ontario, CA.
"Yes there is a big population of people shifting out of housing but the population of people buying houses is also growing," Ostlund said. "There won't be an oversupply. There are more people to buy properties and there hasn't been any measurable new homes built in the last five years."
"So how much of a degree does the shifting population demographics affect property pricing," Ostlund asked. "It's way way down the list," he answered.
Pete Chinnock, senior associate with Penn-Florida Cos. in Boca Raton, FL, said he too thinks the echo boom will mitigate the impact of aging baby boomers.
"In my opinion it's a very simple answer. It's as easy as Accounting 101, "Supply and Demand,'" Chinnock said. "We go through one of these economic cycles every seven to 10 years and real estate prices are always affected negatively and then positively. They always seem to come out the other side and peak higher than the previous peak."
"The demand for single-family home ownership will always be a goal regardless of age and as long as the combination of internal birth rate and immigration continue to create increases in the population the demand for housing will continue to increase," Chinnock said. "The only variable I see is the type of housing required, based on age, health care needs and economic ability, will shift between single-family, multifamily, senior housing and assisted living due to population demographics, and prices will follow the supply/demand curve for each."
More About Credit Markets than Age Demographics
And there is economic theory to support Ostlund's and Chinnock's views that shifting population is not the most significant factor that will drive future property prices.
What made housing vulnerable to a bubble? And why has the housing market been so impervious to attempts at resuscitation?
Housing is unusually susceptible to booms and busts because simply because of credit conditions, according to Adam J. Levitin, professor of law at Georgetown University, and Susan M. Wachter, professor of real estate and finance at Wharton Business School at the University of Pennsylvania, in a current working economics paper entitled Why Housing?
"Housing market distress transmits to the macroeconomy through a balance sheet channel, a construction channel, and a collateral channel," the two argue. "Because housing is credit-backed and such a large asset class, failure will impact the financial system itself and pull down the economy as a whole. The dual-use of housing, its ubiquity on consumer balance sheets, its highly correlated pricing, and its linkage to the macroeconomy make it a particularly painful type of asset bubble to deflate."
However, according to Kiyohiko Nishimura and El?d Takáts, economists in the Monetary and Economic Department of the Bank for International Settlements, property prices are affected by both aging and money demand.
In their working paper released this month, the two argue that when the baby boomers joined the workforce and started saving, money supply and property prices entered a rising trajectory.
"We conclude that demography was the long-run driver of this process, basing our argument on data from 22 advanced economies for the 1950-2010 period," the two concluded. "According to our lifecycle model, large working-age populations saved for their old age by investing in property and broad money instruments, such as deposits. In the past, savings activity by baby boomers drove up property prices and also increased demand for money. As baby boomers retire, these dynamics will go into reverse."
Yet another wrinkle to factor into this complex equation was put forth by Mark Russell, is the City Assessor for the City of Yonkers, NY. Just because there is an echo boom coming into its prime earning years, doesn't necessarily mean they are as interested or in financial position to strive for their parents' dream of homeownership.
"We have seniors that need to down size their homes or acquire a (single-level) apartment... and they will be unloading their homes in record numbers. But who will buy these homes?" Russell asks. "With oversupply, there has to be a reduction in price especially with gun shy young people that do not even know if their jobs are secure. Also a young person may want to maintain the flexibility of being able to relocate without the burden of unloading a home."
"So you have an upcoming glut... due to downsizing, young people with less income and desire to be locked into anything for 15 to 30 years, and increasing requirements for down payments," Russell said.
All signs point to long-term reductions in housing prices and ownership, and a more rapid increase in rental costs, Russell said.
Not so fast, adds Diane J. Macunovich, professor of economics at the University of Redlands in California. She suggests all the fuss over an aging population may be focused on the wrong age group. According Macunovich, what we should be worried about are the gaps in the youth populations that may trigger future recessions.
In her paper, The Role of Demographics in Precipitating Crises in Financial Institutions,
more than 70% of major declines in the proportion of 15-to-24-year-olds in the population have been associated with declines in GDP growth, according to her study of worldwide data from 1960 through 2005.
"A boom in the population of young people seems to boost producers' expectations," Macunovich argues. Unfortunately, those producers fail to cut-back when the boom abates, "and the passing of the bubble causes defaults and bankruptcies, which prompt foreign investors to withdraw funds and speculators to unload the local currency."
"This appears to have been the pattern in four financial crises since 1980, as well as Japan's "lost decade,'" Macunovich argues.
Meanwhile, Clarion Partners' Tim Wang sees several economic factors affecting this key age group that is and will continue to drive demand in the multifamily market.
"Multifamily properties primarily serve renters age 20-34. This demographic cohort is expected to increase substantially as Echo Boomers graduate from college. Most of them will not and cannot afford to buy homes. Tightened lending requirements, the flexibility of renting, large student loan debt, and the trend for young people to postpone marriage and start a family all affect decision making to the clear benefit of the rental property market," Wang said. "Therefore, we believe that the demand for multifamily rentals is likely to remain strong over the next several years."
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