Aging populations from the post World War II baby boom and changing demographics will certainly transform real estate markets in the next decade. Opinions differ on whether North America will see another major real estate crisis, this one caused by a senior sell-off, but there are several trends and fundamentals that simply cannot be ignored.
First, consider that the two decades from 1990-2010 witnessed the peak household size of the baby boomer generation. Boomer parents were raising their children, and largely doing so in suburbia: according to researcher Arthur C. Nelson, 77% of new residential construction in the U.S. was driven by this trend. Consider that 80% of new homes constructed in that period were detached single-family homes, and of those, a third were 2,500 square feet or larger.
So if the last two decades’ real estate growth was overwhelmingly driven by suburb-obsessed boomer parents, what happens now that their children have left the nest? Do they still need a four-bedroom, three-story house with an acre of lawn to maintain? Many may not yet be ready to put on their sandals and sun hats, but the time will soon come when they are unable or unwilling to walk up and down so many stairs, mow that acre of lawn every week and pay to heat such a large (and largely unoccupied) house.
This leads to several questions. Where will they go, when the time comes to move? Will there be any buyers to take up this inventory? If so, who?
The answers to these questions remain partly cloudy, but there are still probable conclusions to be drawn. First, baby boomers will likely draw towards more “walkable” neighborhoods: suburban centers and upscale downtown areas. Driving everywhere becomes less tenable and less desirable for many seniors, so the ability to walk to grocery stores, restaurants, art galleries and other amenities will be attractive to aging boomers. See WalkScore.com for a more interactive and in-depth perspective into the walkability of neighborhoods around the country.
They will also be downsizing to smaller ranchers, two-story townhomes, or apartments/condominiums with elevators and maintained grounds. The older seniors become, the more likely they are to switch back to renting their home – 79% of households over age 85 are renters – which will increase demand for rental units over the next decade.
Where do the traditional senior destinations like Florida and Arizona stand in all this? Some data indicates a resumption of this trend, which slowed in the recession and its aftermath. And with many young adults moving south and west as well, more seniors may follow to be near their children and grandchildren.
But who will buy their housing inventory?
One group is “Generation Y” or “millennials,” who are just now entering their child-bearing years. This generation is notoriously less likely to buy real estate however, having witnessed the real estate crash of the last decade and saw their parents’ homes foreclosed on or plummet 25% in value. Among Americans under 35, 36.8% own homes today, down sharply from 43% in 2006. This generation is also carrying far more student loan debt than any prior generations, and has far less in liquid savings or investments.
There is also a racial and cultural demographic shift, as Caucasian Americans prepare to become a minority. The fastest-growing ethnicity is Hispanic Americans, but the education and income rates among Hispanics are currently far lower than that of the aging baby boomers whose houses will be up for sale. This gap will mean that the fastest growing segment of the population will have trouble affording the large, expensive suburban homes that boomers will be trying to sell, and a pessimistic outlook for these homes’ prices.
And then there is slowing population growth. The aforementioned Arthur Nelson, director of the Metropolitan Research Center, calculates that there will be around 35 million over-65 households by 2020 in the U.S., and roughly 200,000 more seniors trying to sell and become renters than there will be new households entering the real estate market to buy them. That figure could balloon to a half million housing units each year by 2030.
This is hard news for baby boomers, and for the rest of us, as it will be our (already strained) social safety nets that catch all of the falling boomers.
So what can boomers do now to prepare? First, they should consider buying their easy-to-maintain, highly-walkable condo or townhouse now, and keeping it as a rental property until they are ready to move into it. Homes are still undervalued compared to fundamentals in most markets, and they will be beating the senior rush that will take place later. Second, they should plan for the possibility that their home will not be worth what they think it is, and will sell for far less than they hope, when the time comes to move. Third, they should prepare for the possibility that they will live into their 90s, which may mean working later than they originally planned, and/or saving more of their income now.