Housing Crash
August 12, 2006
Insurance companies and investors have actuary studies that show that people do predictable things at certain ages. The 77 million baby boomers bought houses in the 80’s and early 90’s as they moved into their peak earning years. As early as 1982, they were calling the rising sales a housing market bubble but by 1992, they were talking about a housing slump. This eight-year period marks the peak house buying ages (from age 27 to 37) of the boomers.
Those same actuary studies indicate that it is inevitable that those same boomers will sell their homes in record numbers as the owners age, moving out of their large primary homes for a smaller home - usually seeking a ranch style (one floor) or a condo (no yard maintenance). The so-called “empty nesters” will most often sell the larger homes (4 or more bedrooms or over 3,000 sq ft), second homes and those with high-maintenance property. In Vermont, these are also the homes with high heating, electricity and tax costs that are likely to be sold.
There is another reason that the boomers will sell. In their lifetime, most boomers have never seen a prolonged period of time when there was a major housing market crash with protracted losses in real estate investments. In fact, under the motto of, “No one has ever lost money in real estate”, many boomers invested in their homes with the idea that it will gain in equity and, when sold, will provide a substantial boost to retirement savings, adding to the motivation to sell. Thinking of taking advantage of large real estate appreciation of the past, a home bought in the 80’s would, by that logic, be reasonably priced in the seven figure range by the time they retired in the early to mid 2010’s. This might have been true if there weren’t so many that had the same idea.
Certainly some will keep their homes but it is a statistical certainty that more than the average quantity will sell. As with the buying boom of the 80’s and early 90’s, this sell-off will occur over a relatively short period of about 10 years probably something like 2009 and 2019. The laws of supply and demand dictate that prices will drop as the supply increases but unfortunately, the demand will be dropping at the same time.
Following the baby boom of the late 40’s and 1950’s, we experienced a precipitous drop in birth rate. This was due to the rebound from the baby boom combined with the introduction of “the pill” in 1960. The result was a fifteen year drop in birth rates. However, many boomers decided to put career ahead of family or to have children later in life, resulting in an echo boom that diffused over a longer period of time - more than 30 years. The end result is that anything of enduring quantity created to accommodate the volume of baby boomers will be in excess supply for more than three decades before the population will again rise to the levels to create a similar demand.
One possible scenario – The Housing Dimple – the economic reverse of the buying boom of the 80’s: The boomers sell-off will increase normal annual large home sales by as much as 400%. The expected buyer population will be much less than the volume needed to maintain a modest market demand. As a result, there will be a glut of unsold large homes on the market. Desperate sellers will lower prices and new construction of large homes will virtually stop. The excess supply will drive the sale price of large homes down and home values will fall dramatically. In some of the more contested markets, a home that might have sold for $650,000 in 2005 might sell for $250,000 or less in 2015.
There are, of course, lots of factors that might mitigate this kind of scenario. There are also lots of factors that might exacerbate this scenario. It gains credibility when you consider that this has already happened in some high value markets. Actuary studies predict a high statistical probability that there will be implications and ramifications in real estate and in other markets and investments. Large losses as well as gains are possible. A prudent choice might be to plan ahead.
References:
http://www.realestatejournal.com/buysell/markettrends/20060619-fletcher.html?refresh=on