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.
This was a very interesting article that brought up many points that I have actually thought about before. I have noticed that most of my friends are older than our parents were when they first got married and moved into a real home. My friends that are married are still living in little apartments. There is definitely a difference in the mentality of the generation x and the baby boomers when it comes to real estate. I think that this could make it easier for us to own homes in the near future if the market gets slow enough!
but the problem is that there is an economic crisis..no person would buy real estate with this situation..
"Seriously, Donovan? You think illegal immigrants are buying McMansions in large numbers?"
You minsunderstood me.
I stated, "large packets of illegal immigrants". By that I mean a dozen or so illegal immigrants are co-buying/co-habitating a McMansion off of 12 low wage "service industry" jobs.
These are the people who are buying the boomer McMansions.
It would make sense for the baby boomers to downsize when kids move out, but americans always want big !
Just thought I would let you know about a new website dedicated to baby boomers called BOOMj.com that your readers may be interested in. There are many nice sections (health, movies, finance, travel etc.) where you can meet new people as well as keep up on all the latest news, tips and goings on in the world. You guys should check it out if you feel so inclined. See ya.
Another Gen X'er who prefers small houses.
Grew up with my family of 4 in a 1920's 6000+ sqft. mansion which was a money pit & maintenance nightmare.
$300/month in the mid-1980s to heat it (this in a climate where you usually run the A/C April-October)
Dead rooms (formal living room, dining room, library) you never used, but still had to clean/heat/pay property tax on.
I'll never forget when the one cast-iron drain pipe for the entire upstairs let go - in an interior load-bearing wall - grab the sledgehammer and watch the plaster fly!
(trashed both the formal living & dining rooms)
My family of 4 lives very well in a 1500 sqft. home - which I paid off before age 40.
Plonkee, you bring up a good point! That would truly stink. The Globe article did point out that traditional starter homes will still be in demand as Gen X/Gen Y/moderate income immigrants vie for their first homes. But the idea of more successful Gen X/Gen Y/immigrants competing with Boomers for the same upscale condos wasn't raised in the article.
One solution to the falling McMansion sales would be to divvy them into multi-family homes. Where I live there are a lot of former single family Victorians that have been split into 2-4 apartments or condos. So perhaps handy Boomers can convert their homes and the not-so-handy Boomers can sell to a developer/contractor? This would allow the Boomers to sell while adding to the housing stock for first time homebuyers.
There could also be a problem if the boomers want to downsize into the smaller homes that Gen X or Gen Y also want / can afford. I somehow think that would mean everyone loses out.
Very well written post.
Unfortunately things stand to get pretty ugly for boomers in the next several years. I am going to write a post and link to this article soon, but all the information you need to make a decision about housing (or help your boomer parents) is both front and center and buried at The Housing Bubble Blog (just add a www and com to get there, don't want to be filtered out or seen as promoting, not my site anyway)
Great post. PBS recently had a 2 hour documentary describing this Baby Boomer cycle. I forget the exact name of it but is was titled something like "Baby Boomer Generation: 1946-2046".
Tim - My guess is it could depend on how long you intend on staying your home. If you think you'll be there for 5 years or less, then you could run the risk of losing money when you move. I know my home, my first one, dropped $20K by the end of 2006 because of the market in MA. But, if you plan on staying your home for a longer time, then you could break even or make money. I think the longer you stretch out the time in your house the lower the risk, but I am not an expert.
Also, a house is a little different, since it isn't just an investment but your home. For me, watching my money fly out the door to buy blinds, pay property taxes, etc. is alarming. But, I no longer have to worry if the landlord is going to raise my rent.
What does this mean for those of us Gen Xers who are about to buy a home in the next year or two? Will the cost of housing go down in that amount of time so that we can afford a better house? I'm also wondering if this could result in a large stagnation or drop in the market such that the value of a house bought in the near future actually goes down. I think this would be the worse case scenario for the Baby Boomer hoping to retire and for their children who are betting on the price of their newly purchased houses to rise at levels they grew up seeing.
M, conventional thinking would suggest this but I think that generation in particular has gone against convention for a few reasons.
First, these boomers grew up in very large families, sometimes with 8 or more siblings. They were raised on very modest means. Because of this many also did not have the chance to go to college and began their careers right out of high school in a blue-collar type job.
Many of the boomers also settled down at a very young age and started a family while working on modest wages which didn't provide enough income to sufficiently move into bigger and better housing so they were satisfied with where they were and building a (small) family.
Fast forward through the next 15-20 years and the kids are becoming grown and the parents are finally at points in their careers where they are making decent money, some went back to school, etc. Now that the kids are gone and the boomer parents have the means they begin to realize their dream of owning a nice house in a nice subdivision that they have not yet been able to enjoy.
This was fueled by the rapid expansion of the 90's and finding funding real estate was so easy, why not?
I don't think this applies to everyone, but I do think their generation grew up in a time where material things weren't as important and this continued through most of their adult life. But the rapid growth of technology, money and a rise in home prices lured many of the boomers who were finally able to participate in upgrading their lifestyle did.
Now, as retirement looms they have realized that they may not need that house in the wealthy subdivision, they don't need 3 bedrooms, they don't need 3 acres of land...
So I think that is where the shift in our generation comes in. We generally did not grow up with more than one or two siblings, many of us have gone on to college, and there is an ever increasing trend of waiting many years to get married and have kids. This difference I think has a lot to do with how our parents treated homes vs. how their children do.
Of course I have no background in sociology or any human studies, this is just my general observation and opinion. I'm sure there are more profound reasons for the generation differences that can be explained in research that I'm not aware of.
I think you nailed it with your heading "A False Sense of Worth". I try to avoid looking at our house as an investment by not figuring the home equity into our net worth calculations.