The 2000 Census gives us an estimate of 78+ million Baby Boomers, people born between 1946 and 1964, in the U.S. This group of people is entering their retirement years now and over the next decade. They're also the richest age group, both in real estate held and savings and investment accounts. Their lifestyle decisions going into retirement will influence the economy in a number of ways, and real estate will be right at the top of the list.
One thing we have in this country is a large group of "economists," and "market analysts." What's interesting about this group of real estate market-watchers is that there are two very different ways in which they predict Boomers will influence housing markets over the next decade. Let's take a look at those two opposites and see how each can change the way real estate investors approach their markets.
The "Golden Handcuffs" Scarcity Theory
This prediction of how the markets will be influenced by Boomers assumes that the overall real estate market will continue to improve and be boosted by a scarcity of supply for a number of years. Boomers in many areas are sitting on real estate worth a fortune, but they don't have a lot of cash; the "golden handcuffs" of real estate riches they can't afford to sell. If they sit on their homes, inventories available for buyers will be reduced and home prices will improve with this scarcity of supply.
The golden handcuffs will cause more of these owners to stay put; many may seek out second mortgages or reverse mortgages to improve their retirement with cash locked up in their homes. Many of these golden handcuff owners are in areas with very high-priced real estate like California, New York, and other areas in high demand. Others are all around the country in high-dollar real estate neighborhoods. There will be fewer homes available, higher prices will result, and markets will be happy.
What's the outlook for investors in these areas, particularly rental property investors? With few homes for sale and high prices, there will be an increased demand for rental homes. Unfortunately, there will be few for sale that will be suitable for cash flow investing. However, the sharp investor who wants to invest in these markets will look to the edges. Rents will be high, something we like. The tenants will be forced to move outward from the center and they'll pay higher rents the closer they can locate.
The Dump-and-Move Theory
Whether they're downsizing with empty nests, or they're realizing their retirement dream of moving to the beach or mountains, this theory states that there is going to be a massive sales glut when Boomers begin to move. Because the core of this group is already entering retirement and we're in a shaky recovery from the real estate crash, this is not a happy prediction of what's coming.
If this very large group decides to sell for any reason, it's going to throw millions of homes into a market that's only recovering right now because there is a shortage of inventory. The addition of these homes could cause another round of price decreases in many markets.
They won't be foreclosures, but investors can take advantage and purchase at below market value prices, converting these homes to rentals. The vast majority of market analysts all agree that there will be even more demand for rental properties over the next five to ten years. Real estate rental property investors can use this Boomer home dumping to grow their portfolios.
Real Estate is Local - It's a Mixed Bag
In any given market around the country, one of these market outcomes could be in play already. Real estate is local, and those high dollar homes along the coast in California may lock up their owners with golden handcuffs. However, go to a small town in the South or Midwest, and you could see the exodus of retirees creating a surge in housing inventory.
The good news is that real estate investors are ready for either situation, and there's profit in being prepared. I'm excited and looking forward to the opportunities either or both of these situations will offer; thank you Boomers!
- Dean Graziosi
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