Boomer Demographics
The demographics of the coming crash are undisputed and unavoidable. They pertain to the market forces driven by the baby boomers – all 77 million of them. 21 million households in the US are boomers – 46% of the total homes in the US are boomers. Their influence comes from the fact that there are so many of them. Their impact comes from the fact that this large quantity rose and fell so quickly.
Following WWII, a lot of horny soldiers and sailors came home from the war. They married, made babies and worked very hard and were a part of making a lot of new infrastructure and industry come into its own. The world was making a rapid recovery, economically, from the war years and the economies of most industrialized nations of the word began to grow rapidly. Despite a brief interruption from the Korean War, this growth trend continued. This was a good thing because the huge quantities of babies cost a lot of money to care for and educate. Fortunately, our industrial and economic success could absorb the burden of those costs.
In a relatively short period – from about 1950 to 1960, the baby population grew to record levels. This was a huge influx of people into our society. By 1960, most of the WWII generation parents had had two or more babies and were now ready to settle down to being parents. Coincident with that, came “the pill”. The first easy to use oral contraceptive that was safe and worked. The birth rate plunged to very low levels and did not rise again until the echo-boomers (the children of the boomers) began having their children.
The baby boom officially was from 1946 to 1964 but if you look at the above chart, you will see that from 1950 to about 1960 is the greatest rise and from 1960 to 1974 is the largest decline in births. Using the median age of these groups, you can see that the average boomer is 52 years old in 2007 and will be 65 in 2020.
The rapid rise of the boomers is what created the school shortage and overcrowding in the 50’s and 60’s.
In the 60’s, we had the Love Generation, Hippies and counter-culture that were primarily driven by 77 million teenagers going through adolescents.
In the 70’s we had a massive boom in employment as these 77 million people entered the workforce. Part of that boom was in massive increases in productivity as more people with money began buying the things that adults buy and the manufacturers had to increase production to keep up with demand. Another part of the workforce extended the counter-culture and boom in personal computers into the workplace. This created the beginnings of the tech boom, personal computer sales and the entire software industry.
In the 80’s, when the median age of the boomers was in the early 30’s, they reached their peak home buying years. The housing boom of the 80’s drove home sales and new construction to all time highs. Car sales also boomed as did furniture, TV’s, microwave ovens and the other entire household and family expenses that come from full employment.
In the 90’s, the boomers were approaching their peak earning years in their 40’s and 50’s. With that earning, they began, for the first time, earning more than they were spending. In this decade, the boomers put more than $7 trillion into the stock market – mostly into mutual funds. This rapid influx of money into businesses allowed them to expand, do R&D, introduce new products and explore new markets. This was massive influx of money was what drove the technology boom of the 90’s. The search for new investments created Silicon Valley and put Apple and Dell and Microsoft on the map in a big way.
The large amount of money was, in fact, larger than the real value of the stocks that were being invested in. Price-Earnings Rations (P/E) of the mid 20’s was considered to be reasonable and normal but toward the end of the 1990’s, we were encountering P/E rations of 180 or more. This was a bubble in the truest sense of the word and existed only because of the competition between investors to find and invest in almost anything that would show a profit.
Surprising is the fact that beginning in the late 1980’s and continuing to the present, the boomers, as a group, have saved less money than any other generation. In fact, the net total spending of the boomers exceeds the net total earnings for the past decade and a half. That means that the boomers are buying things faster than they are earning money to pay for those things. There is a net negative savings across the entire group of boomers.
The realization of the possible impact of the crash of society from the Y2K scare, the aging and maturing of the boomers and some nasty manipulations by the banks and Wall Street giants brought the boomers back to reality by 2001. We experienced the Tech Bust of 2001. Stocks crashed. Thousands of tech companies with P/E’s above 80 simply ceased to exist.
For a brief time, people tried to recapture that moment of robust stock activity by “day trading”. The single guy that thinks he can find that winning stock better than all the Wall Street gurus. That quickly died when they realized that sales commissions and taxes ate up all but the luckiest buys.
In the early part of the new century, the boomers have mostly been earning lots of money, putting more of that into investments and buying more stuff. Since they are earning as much as they ever will in their lives, the boomers are searching for places to put all that money. What they found and are buying in massive quantities are second homes, vacation homes, big-ticket items like expensive cars, boats and airplanes. Vermont is one example – there are more non-resident homeowners than there are resident homeowners. Major sports and entertainment centers have grown significantly in this period. Las Vegas, Orlando, Vale Colo., Vermont, the Gulf coast, etc..
As we come to the end of 2007, we have a few boomers that want to retire early. These are the boomers that did well in the stock market, bought big homes and second homes or vacation homes. They are empty nesters because the kids are not living at home and many of them are already out of college. When looking at the value of their homes and their real needs, many are deciding to sell off their homes and retire early. If one in ten boomers are doing this, that is more than 2 million homes put on the market in a relatively short time. It might be more if the couple with a big main house (over 3,000 sq ft) and a vacation home or second home want to sell both of them to buy a ranch or condo. That puts two houses on the market.
The early impact of this began in 2004 and has been increasing since. As more homes come up for sale at the same time that the buying population is decreasing, the homes have to go down in price to sell. This is often measured by the “time on the market” before a sale is closed. In early 2004, the average time on market was 37 days. By the end of 2004, it was 67 days and by the end of 2007, it was 137days. That is the average. In some markets, sales are almost at a standstill with time on market measured in years.
Of course, if you are among those that want to sell your home to retire early, you will lower the price to sell it in this kind of market. Home sale prices have dropped more than 25% in some flooded markets. New home construction is way down, especially for large homes. The shows on TV about “flipping” a home are now telling stories of homes that have not sold in 6 to 9 months.
A by-product of all of the money and home sales is creating a secondary effect in the economy now. In the 1990’s and up to about 2006, the banks have had so much extra money that they were having a hard time finding people to lend it to. They are, after all, in the business of selling money in the form of debt, i.e. loans and the biggest loan is for real estate.
Like any business, when they have too much inventory, (in this case the excess inventory is money) they have to lower the price. That took the form of lowering the interest rates on mortgages but that was not enough, they also needed more buyers so they lowered the standards needed to qualify for loans. This is the sub-prime market and the adjustable rate mortgage markets.
As was fully predictable, these high risk loans do what high risks loans do, they defaulted. Some defaulted because the adjustable rate mortgage adjusted upward to a point they could not pay. Some defaulted when they realized that the housing bubble has popped and their home is not worth on the market what they still owe on it. Still others were simply bad risks that never should have qualified for a loan of that size. The result has been a huge drop in the value of real estate and related investments. That has pulled down the worth of the banks that valued their property or mortgages as part of their net worth and market value. The failure of several banks has shown that it can happen and is causing the stock market to react by an exodus out of real estate and financial markets – dropping the market further.
Unfortunately, this is all in advance of the highly predictable impact of the retiring baby boomers. In the second decade of the new century, we will see the boomers begin to retire at a rate that will rise to over 1,000 per day.
Once retired, they will want their social security and Medicare which is another can of worms that I’ll cover in another article but suffice it to say that the US Government is not at all ready for what is to come. Since so many saved so little during their peak earning years and so many planned to finance their retirement with the sale of their homes plus social security and investments that any drop in any of those three sources of income will become significant. Unfortunately, all three of those three sources of income will probably be way less than anyone had planned for.
These retired boomers will put their homes up for sale because that is the way that most planned to finance their retirement. As with the housing boom of the 1980’s, the bulk of boomers will try to sell within a relatively short period of time and the result will be a flooded market with way more inventory than buyers. Prices will drop thru the floor. It is, indeed, unfortunate that the sub-prime and mortgage financial crisis has hit at this time. This may well depress the market until the bulk of boomer homes floods the market – driving prices even lower and creating even more defaults and foreclosures.
As we have seen in 2008, the sub-prime and mortgage financial crisis has spread to the general stock market which is down to where it was 16 years ago and still going lower. Gold is at al all time high and there is talk of a recession that will devolve into a major depression. It is, indeed, unfortunate that this stock market financial crisis is hitting just as the boomers are retiring because it is now that they will begin to withdraw that $7 trillion that they put into the market over the past 20 years. Cash out of stocks will put more available stock on the market – lowering the price. Dividend payments will withdraw cash from corporate spending and cause them to cut back in other areas – most often it begins with R&D and plans to expand and then moves into cutbacks in production – cuts in staffing. We have seen massive layoffs from all of the airlines and all of the automakers and many smaller industries and businesses. The current crisis will bleed right into the period when the boomers will suck out their investments and lower the market even more. If they panic and try to withdraw early or all at once, this could collapse the market. Certainly the investments that the boomers are planning on will be much less than they think they will be by the time they begin to withdraw it.
The bottom line is that the baby boomer demographics has caused and will cause massive changes in the US economy in each age it has influenced. A prudent investor will find ways to profit from such an economy.