A reader recently forwarded an interesting article to me (which I encourage everyone to do) about the real estate generation gap. This article does a fantastic job in presenting a very real problem with our current real estate situation. With an already soft real estate market the prospect of even more homes fueling the inventory makes the situation potentially much worse.
Baby boomers have fueled the housing market for the past 10-15 years as their kids moved out and a strong economy allowed them to buy or build a bigger house. As retirement draws near, many of these boomers find they no longer need as much house or are possibly looking to move. Typically that wouldn’t be a problem, but it is. The problem is that many of those in Generation X do not seek or have a desire to own a large home, or aren’t even at a stage in their careers where that type of purchase can be made. As more and more boomers seek retirement and the sale of their homes, who are the buyers?
A False Sense of Worth
Another big problem with the boomer generation is that many find the bulk of their net worth tied up into real estate. Many of these individuals purchased or built a new home during the rapid expansion of the 90’s and saw home values double or triple in some places. This growth fueled the idea of using their homes to fund a large portion of their retirement. As home prices level off and begin to fall in some areas these people will not be able to get what they want for their home. Some will simply refuse to sell at the discounted price while others will sell and take a significant hit. Suddenly they realize that they don’t have the money they thought they did.
Unfortunately this is all too real. I met with a woman just this week who was planning on retiring in the coming year and was seeking advice. Her retirement account was valued at under $40,000 and she said she realized it wasn’t enough. So I asked what her plans were, if she was going to continue working part time or had other savings and she said no. She told me that she had planned on using her home for the majority of her retirement when she sold it and moved, but she was upset because she can’t sell it for what she feels it is worth right now and doesn’t know what to do. A very sad story indeed.
How Serious is the Problem?
Clearly the soft housing market is a cause for concern for these people, but how serious is it? According to the article:
If every single member of Generation X wanted to buy one of the baby boomers’ 34 million homes, and every single boomer wanted to vacate, all the homes would get sold, with 15 million Gen Xers left over. But the numbers don’t actually work out like that, since most young would-be buyers are coupled up. In reality, there aren’t nearly enough Gen X households to go around — and it’s not a generation that particularly likes the big homes that many boomers have gone for, anyway.
That is a problem. Clearly not every boomer will sell just like not every Gen X person will be buying, but the numbers are fairly alarming. There are many more boomers than our generation and we don’t even care to live in the houses they do, who is going to buy?
With my parents being a part of the boomer generation and myself as part of Generation X I have seen this scenario play out almost to the letter. Growing up we lived in the same home for nearly my entire life. It was a small single family home with 3 bedrooms and one bath in a somewhat rural setting. This was my parent’s first home and they were able to buy it for under six-figures. As we got older and the surrounding area began to grow the value of the home continued to rise, and they knew they had a nice investment on their hands.
When I went off to college they decided they wanted to upgrade a bit. Having lived in the same house for nearly 20 years while it nearly tippled in value it seemed like a good time to sell. Sure enough, this was in the 90’s and they were able to easily fetch the asking price. In realizing this sizable profit they decided to parcel off some of the land they owned and build a brand new home they have always dreamed of.
The home was built and it was beautiful. It is everything they wanted and more. Unfortunately the cost to build a new home in the same area in the late 90’s cost a pretty penny. Having gone through the process of watching their previous home appreciate in value they saw this as a wise investment since they assumed it could be sold when they want to retire for another sizable return. Unfortunately this isn’t the case.
The area has a depressed economy due to the decreasing manufacturing industry that it relies on in the surrounding area. As more people are leaving the area than moving in home prices have taken a big hit. To further compound the problem my parents are reaching retirement and no longer have the desire to continue the long commute to work each day and would like to live closer to work in the last few years. They are going to try and put the house on the market in a few months but they already realize they are not likely to sell it for what they expect it to be worth and could lose money. So much for that investment.
Typical Baby Boomer Real Estate Cycle:
- Start out with a modest first home to raise a family
- As the kids grow old and begin to move out, upgrade to a new and/or larger house
- As retirement nears, relocate or move into a smaller home
The problem is that our younger generation doesn’t want their McMansions or large homes. Our generation is waiting longer to get married, having fewer kids and focusing on building careers. We don’t have a need for larger homes nor can we afford what our parents are asking for them. The boomers are left holding the bag, and I’m not sure how this will ultimately play out.
I encourage you to read the article over at the Boston Globe as it touches on many additional issues that I did not. It is a very interesting read.
Author: Jeremy Vohwinkle
My name is Jeremy Vohwinkle, and I’ve spent a number of years working in the finance industry providing financial advice to regular investors and those participating in employer-sponsored retirement plans.