The Baby Boomer generation broke records for its size and have dominated American business, culture, and politics since they reached adulthood in the ’70s. Last year, their children and grandchildren, the Millennials, overtook the Boomer generation as their numbers swelled to 73 million. The two “mega-generations” are so large that the combined size of both generations limits opportunities in areas like employment and housing.
Without the savings to retire during and following the Great Recession, many Boomers stayed in their jobs after they turned 65. The combination of a shrinking economy and reduced retirements slowed the careers of millions of Millennials which led to them taking longer to make enough to buy their first homes. Compared to Baby Boomers, only 37% of Millennials between the ages of 25 and 34 own homes.
The strain on America’s real estate markets is so great that even one minor change in Boomers’ homeownership patterns can significantly affect Millennials. Traditionally, after children leave home, their parents “downsize.” They sell the family home, cash in the equity they have accumulated in their homes, and move into a retirement community or buy something much smaller to reduce their living expenses and chores.
Not the Millennials. Seventy-seven percent of people over the age of fifty want to stay in their homes as long as they can. This process of “aging in place” has helped to increase the average tenure to ten years. Despite the increase in equity, median tenure length jumped ten years in September 2018, and by last October, median tenure length reached its highest level in 18 years.
“Aging in place” Delays the Inevitable
“The recent dramatic spike in tenure length is reflected in the growing performance gap between market potential and actual existing-home sales, which is up 48% since the end of 2017,” said Marc Fleming, Chief Economist at First American. “Homeowners are staying in their homes longer than ever, limiting supply and slowing home sales.”
Despite the cost of retrofitting a home for seniors, a Freddie Mac study last year estimates that approximately 1.6 million more senior households are staying in their homes than what would have been the case if they “behaved like older generations of homeowners.”
However, aging in place may be just delaying the inevitable. “More than half of all existing homes are owned by Baby Boomers and the Silent Generation, who will eventually age out of homeownership,” says First American’s Fleming. “When that occurs, the problem may not be a lack of supply, but the exact opposite.”
The oldest Boomers will reach 75 this year and it will take a few more years for the bulk of their homes to be sold. When it does arrive around 2025 and last through the end of the decade, some economists anticipate that over the next twenty years the flood of Boomer homes will reach upwards of 21 million, more than a quarter (27.4%) of the nation’s current owner-occupied housing stock. Over the next 20 years, homes are likely to hit the market as their current owners pass away or vacate their homes.
Not all of these will end up on multiple listing services and real estate sites like Homes.com right away, if at all. Many Boomer homes will require significant repair and remodeling and rather than pay to get their houses in shape to sell, many Boomer homes will be sold to “cash for homes” companies like HomeVestors or “iBuyers.” Both of these options are attractive because families can sell quickly to settle estates or use the proceeds to pay for long-term care. They also avoid paying brokerage fees. Once they are fixed up, then these homes may eventually end up on MLSs.
Millennials Don’t Want to Live in Boomer Houses
Boomers will face a big problem when they try to sell to Millennials. Their homes are large, expensive, and out of date. Young buyers prefer open living spaces, roomy bathrooms and kitchens with enough space for family gatherings.
A recent analysis of Boomer Zip Codes found that most live in major cities, not necessarily suburbs or retirement hubs. New York City is a serious contender for the title of the most popular place to live for baby-boomers. The urban districts of San Francisco, El Paso, Houston and Chicago make price the primary reason Millennials won’t be buying from Boomers
Many young buyers are saddled with debt and earning just enough to buy a first home in markets like Des Moines, Grand Rapids, Wichita, Omaha, and Toledo. Even in these places, Boomer homes will cost too much.
Sixty-five percent of owners ages 64 to 72 and 56% of those over 73 own homes worth $200,000 or more. Source: Statista.com
Move-up Buyers Can’t Move Up
As large numbers of mid-to-upper priced Boomer homes come to the market, they will still have a positive effect on real estate inventories. First-time buyers looking for starter homes aren’t the only ones suffering from inventory shortfalls.
The inventory epidemic has become so severe that it is moving up the real estate ladder. Supplies of mid-priced homes are now declining, and their prices are rising. “There are many Gen-X buyers who are still trapped in their first home and that’s because they can’t find the home that they want to trade up. And so, you get this ratchet effect that occurs with the lack of construction, which is not just impacting entry-level, first-time home buyers, but even trade-up buyers,” says Sam Khater, Chief Economist for Freddie Mac.
In normal times, real estate agents counsel their clients to sell their current home before making an offer on a new one to avoid being stuck with two mortgages. In today’s seller’s markets, however, it’s much easier to sell a house in the mid to lower price tiers than to buy one.
In November 2019, for homes priced below $100,000, inventory was down 15% annually. For those priced between $100,000 and $250,000, supplies were 7% lower annually. In December, usually the slowest month to sell a house, properties remained on the market for just 41 days. Forty-three percent of homes sold in December 2019 were on the market for less than a month. In these conditions, move-up buyers will be safer if they buy before they sell.