Boomers and Housing: A Symbiotic Relationship Unravels
When the housing market was soaring, many baby boomers thought of their homes as piggy-banks that could be cracked open in retirement to finance retirement.
High housing prices would allow us to leverage equity to finance our lifestyles, buy second homes or pay entry fees into retirement communities. That thinking was encouraged by the financial services industry, which aggressively marketed low-interest mortgage debt and equity-to-cash products like home equity loans and reverse mortgages.
But the piggy bank was smashed when the housing market crashed. And today's high unemployment rates, sagging incomes and rising foreclosure rates make it unlikely that we'll see a strong rebound anytime soon in housing. True, the widely-watched Standard & Poor's/Case-Shiller home price index released this week showed U.S. home prices rose in May on a month-to-month basis for the first time since July 2006. But that shouldn't be taken as a sign that the market is going to rebound to pre-crash levels anytime soon. At best, the Case-Shiller index hints that we may have found a bottom in housing. Maybe.
To be sure, the housing crash has caused pain for every American demographic group. But older Americans have the greatest exposure to real estate. Consider:
--Seventy-nine percent of Americans over age 55 own their own homes, compared with a national median ownership rate of 69 percent. As prices soared during the bubble era, boomers took on larger mortgages, and a greater percentage are now carrying mortgage debt well into their 60s than ever before.
--Home equity accounts for one-third to half of all net worth for older Americans; the only larger source of household wealth is Social Security. (Despite all the buzz about the stock market's crash, housing actually impacts a much larger group of Americans, simply because home ownership is spread much more evenly across income groups than equity investments.)
-- 30 percent of Americans age 45 to 54 are underwater on their mortgages, according to one study--that is, they owe more than their homes are worth, and would need to bring cash to a closing.
Warning signs were flashing in the housing market well ahead of the crash, due to basic laws of supply and demand. Baby boomers have been a key driver of housing demand over the past several decades due to our generation's extraordinary size. Now, we constitute an enormous group of potential home sellers as we age and begin to sell homes in order to downsize or move.
But boomers need to sell to a smaller, less affluent pool of buyers. "The most important factor that pushes prices up is when you have more buyers than sellers," says Dowell Myers, a professor of urban planning and demography at the University of Southern California. Myers has been pointing to a huge sea change in the ratio of buyers and sellers that will put downward pressure on housing values over the next two decades.
"The baby boom generation has pushed up housing prices over the past three decades, as they steadily moved up the ladder and bought housing. So people think the last three decades are normal. But at some point boomers will start to cash out."
Myers thinks the buy-sell ratios could be improved if the rate of immigration to the U.S. were to increase significantly, creating greater demand for housing. Likewise, echo boomers -- the children of baby boomers -- could have a positive impact as they come into their prime home buying years -- if housing becomes sufficiently affordable.
While prices have been plunging, the affordability gap remains sizeable, because median incomes of first-time home buyers have been in a long-term, secular fall, dropping 15 percent since 1976. Before the crash, buying power was propped up by liberal bank lending policies that have now largely been curbed. That means echo boomers and immigrants aren't likely to ride to the rescue of housing without a general pick-up in the economy -- and even then, prices aren't likely to recover to pre-crash levels.
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Interest rates on All MORTGAGES regardless of size should be reduced to 4.5% fixed immediately: no modifications, no refinances, no requalifying, just change the rates on the lenders computers -- plain and simple!!! Everyone will have more cash to buy food, clothing, cars etc. on an ongoing basis!! Stimulate the economy by giving everyone a break! Not just Wall street! President Obama could do this by executive order.
I don't follow how Social Security is 'a source of household wealth', like home equity.
Social Security is a source of *income*.
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GarryK, researchers often refer to Social Security as a source of household wealth and measure it alongside other sources like pensions. Since it is such a predictable income source, it is looked at as a source of wealth over a period of decades.
This had to be a planned crash there were too many things changed espically allowing the banks to BREAK THE RICO LAWS !!!!!!!
Non way they could not have fore seen this crash because it is a repeat of earlier financial crisis in other countries.
The Fed knows this !
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This observation may be unpopular and tangenital but:
What would the demographics be if all elective abortions in the USA had not happened?
How many more tens of millions of home buyers would there be - and some of them may have been brilliant musicians.
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check out what happened in Romania when abortion was made illegal
According to the infamous Schiller chart the overall appreciation of housing prices since the 1890s has been a paltry 10% during a period when our population nearly tripled.
American has simply to big and empty a country for such relatively small adjustments in population to have much affect.
Maybe I saw this column elsewhere, because I know I read recently about the percentage of Boomers underwater on their mortgage. I was stunned -- and still am.
As for pensions -- I graduated from college in the late '70s, and stayed long enough at my first job to get a pension, believe it or not. I think it will pay me $325 a month starting when I'm 65. At the time I pooh-poohed the whole thing, but I'm sure glad now!
It's not just Boomers, though I am one -- EVERYONE needs to plan ahead for those "golden years." There's a wealth (pun intended) of info out there -- I like "Die$mart," by Kathy Lane. You just look at the beating retirement accounts have taken over the past year -- I know I felt the need to protect what was left. Die$mart gave me the knowledge to ask the right questions and seek out the proper professionals. I know have the peace of mind that I've done what I can to protect my family and my assets. (I just wish I could say the same of my mother-in-law, who's done some things that, according to this book, will cost us dearly, which I know is not what she wants. On the other hand, well, it's her money.)
Hmmm -- not sure if that link will work, so go to www.diesmart.com.
Well done Mark. Two thoughts I wanted to share. There is no single housing market and most boomers will recover from this shock. Just as during boom times, people professed that housing could never go down, not people are professing that it will take years to go back up. The reality is that there are parts of the housing market that are doing well TODAY. Housing has always correlated with employment and interest rates. Today interest rates are very attractive and parts of the country that have employment are doing well. The big question is what type of housing makes sense. The millennial’s will create strong demand for first time homes, but the McMansions will take some time to recover. Due to owners being underwater, they will delay moving and we will see an increase in multi generational housing again. Boomers will have to work longer than they thought a few years ago, but that could be good for them. Here’s some research on the advantage of staying in the workforce: http://www.creatingresults.com/knowledge/ And since employment boosts housing, boomers working longer will be good for the economy.
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Todd: I agree with your comment about multi-generational housing and working longer (which is something I write about frequently and will be covering in a book I will be publishing this Fall). The multi-generational housing trend will be fascinating, as it rolls up issues such as aging in place, universal design, age-friendly communities and the role of technology in creating age-friendly living environments.
"The reality is that there are parts of the housing market that are doing well TODAY. "
Indeed, and they are all in areas with affluent people. There is no doubt that this crisis is not engulfing all of America but it merely hits those who are on the bottom, already, thus making the social polarization even worse.
"Today interest rates are very attractive and parts of the country that have employment are doing well."
This is questionable. 2x higher interest rates at half the price equal the current interest at current price. It is, however, much easier to come up with a larger down payment at half the price, which all by itself greatly reduces the risk to be under water, thus giving the home owner much lower risk of defaulting. Moreover, the total time to repay the loan is shorter and the total interest paid is much lower in case of low prices coupled with high interest. The current low interest regime comes at greatly increased risks for both buyers and lenders.
Working longer is a good idea. The problem is there will be no jobs available.
This is also why the federal government needs a stronger program for low cost housing and subsidies, rather than simply leaving it all to the free market and private banks.
Generation X is only 10-20% the size of the Baby Boomers, so it's not likely to be paying for their retirement and Medicare, especially because it members are on average poorer than their parents. We are the generation that grew up during a period of general economic decline, after all, with extreme polarization of wealth and incomes.
Government is going to have to get very creative in financing Social Security and Medicare for a while, even more so when Medicare is expanded to pick up more of the uninsured. For all these reasons, it's difficult to imagine how medical and social security costs will be going down in the future.
How could they?
This is why I have been suggesting some type of central bank financing or Tobin taxes for the etitlement trust funds.
Now, the interesting thing is that Generation Y or the Millennial Generation is much larger than Generation X and at least the size of the Boomers. Therefore, it will be better able to pick up many of these costs eventually, provided that this economy revives, and there are all kinds of green and high tech jobs and educational opportunities as Obama is promising.
Gen Y and following are hampered by poor education and competition from Asia. Unlike the boomers which profited from the GI Bill and Gen X which still profit from their parents having had a good education, much of Gen Y is already on the declining slope of the US education system. Moreover, its size is dominated by immigrants. While Asian immigrants have been able to make the best of what the system had to offer and are sending their kids to school, Hispanics have not been so lucky for a variety of reasons (they usually get a worse economic start than Asians and that alone weighs them down for the rest of their lives). All of them are suffering from enormous increases in educational cost, especially for tertiary education. It's hard to pay for someone's retirement while sitting on tens or even hundreds of thousands of dollars in student loans...
The boomers made a major mistake in not giving their kids free education. It turns out to be a major loss for their own retirement.
Gen X: 49.1 million Americans
Boomers: 76.7 million Americans
While Gen X is significantly smaller than the boomers, it is hardly 10-20% of the size. Actual comparison is 64%
This is also mitigated by the 73.5 million Gen Y Americans.
Please check your facts before posting.
The boomers are mostly white Americans. So is Gen X if I am not mistaken. Gen Y has to have a significant Hispanic component, and is therefor economically far less affluent than the boomers are. If you multiply the population statistics with the average income, you will most likely find a nasty surprise for the boomers lurking in the numbers.
The US Census estimates this:
78.2 million
Estimated number of baby boomers, as of July 1, 2005.
Assuming the Baby Boomsers were the cohort born in 1945-64.
It also gives the size of Generation X as only 18-20 million, depnding on which years are used--1965-79, 1968-80, and so on. I would argue that Gen X is even smaller than that.
Back in the 1970's, Boomers only vested pension benefits if they stayed with their employer for 10 years. No one that I knew in those days ever did. I never vested any pension benefits until my sixth employer closed the old defined benefit plan in the 1980's. The good old days weren't that good for many Boomers. But I'm not complaining. I set aside the maximum allowed in the subsequent 401K plan most years and the company was quite generous in those days, adding as much as13% of salary and bonuses to employees' 401K accounts. I never expected the recent crash but always knew that it was possible. Medical insurance has become another big unknown. I can't wait for Medicare to kick in in a few years. For younger Boomers and those following, life will be a lot tougher. Private sector post-retirement medical benefits are rapidly disappearing. They are gone at my old company for employees who joined since the mid-1990's. Retirement now means that you get to pick a gift from the company catalog and maybe you get a going away party.
Great analysis. Finally someone who gets it.
Destory all wealth of the working people and you have a future of facism for the generations to follow.
If Obama and the Democates can walk back all those predatory laws American face indentured servitude if Repiblicans ever regain power.
The simple fact is that the crash was inevitable. The entire concept of residential housing as a growth investment is mathematically and economically untenable. The whole idea that the genX-ers will finaance the boomer's retirement by paying $1million for a $300k house can't work when the younger generation is actually earning LESS money at the same age than their predecessors. You still can't get blood from a turnip.
Housing is a basic life necessity and a social good. We should be making housing as cheap as possible not as expensive as possible. Forcing low income people to pay 50%-60%^ of their incomes for housing (as many in urban areas actually are) is a cynical and devastating form of class warfare. And is an inherent result of the strategy of housing as an investment.
And forget about housing 'rebounding' , the economic basis for the conspiracy (yes I use the term) to create the housing bubble has collapsed . The squawking over short term rallies in housing sales or prices is propaganda which ignores the long term, extremely stable crash in prices and demand.
And no we are not at the bottom. Not when the all the Opt-As loans are just starting to reset, and not as unemployment continues to increase, not as builder continue to build more houses.
And most importantly NOT when prices are above we established historical norms. We are still in the bubble and we have ways to go before it deflates completely.
The bubble was mild. It was turned into a crash by the leverage of CDS CDS. See my profile for details and links.
The bubble was anything BUT mild. It was 3x as large as the housing booms that occurred in the 70's and late 80's. It was 2.5x as large as the increase in housing prices at the end of WW2 and event created by 3 of the most signifigant demographic events of the century, to wit, the baby boom, the postwar increase in consumer spending and the rise of suburbanization.
It was in fact completely historically unprecedented in it's scale.
http://mysite.verizon.net/vzeqrguz/housingbubble/united_states_1890-2008.png
I completely agree. But the US housing bubble might just qualify as the greatest Ponzi scheme of all times. The boomers who got out early skimmed off the late comers and generations X and Y quite well.
:-)
And factor in demographics. Families/households are smaller, but seems homebuilders don't see that, still don't see too many new homes downsized. If the avg household/family has about 2 kids now
(approx) what's the need for 3000 sq. ft. of 5 and 6 bdrm mcmansions?
The Crash was caused by Bankster gambling, not the home loans.
The bankster then got trillions from TARP and the FED,
So they gave out bonuses and are gambling more.
Everything will collapse if this is not stopped.
Don't blame the boomers.
No worries. The federal government, facing this problem squarely, will mandate price reductions on cat food so that no senior need go without. Funny thing, but many Boomers entered a work environment in which they were to receive company pensions-- but their bosses thought better of them so now they are no more. No wonder Boomers came to rely on their houses for their retirement-- after all, their houses were the only asset they had that was going up dependably (see 401K for how investments often don't even keep up with rate of inflation). Salaried and hourly workers have been screwed by the predators of finance who bankroll the campaigns of both parties. Money madness has destroyed our democracy.
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