20
Where House Now?
I GRADUATED HIGH SCHOOL in 1966—yes, before fire was discovered, as my Generation Y daughters would say. I used to feel “leading edge.” In at least one way I am leading edge—a leading-edge Baby Boomer, born in 1947. Now I feel like an “antique” and am not going into this old age thing gracefully. I will go kicking and screaming.
I remember high school graduation very well. I recall that my graduation gift from my parents was a plaid set of cloth luggage.
“When would I use this?” I asked.
“Now,” my parents replied. “You are out of here.”
And I was, in fact, out of there. The last out of eleven children from two large merged families to leave, which I suppose in that case made me “ending edge.”
My stepfather had seven kids and my mom had four. That’s eleven. I was the baby. So I packed my plaid cloth luggage, bought a plane ticket, and flew from Connecticut to Los Angeles, California, at the end of June 1966. By September I had blown through my meager savings and came face-to-face with the facts of life. If I wanted to eat, I was going to have to figure this survival thing out. I did, and then some. I worked forty hours a week and went to school full-time. I graduated California State University, Long Beach, in January 1971 and then got recruited into marketing at Volkswagen of America in Culver City, California.
What’s my point?
I had to leave home and I had to make my own way. It was sink or swim. I chose to swim—out of necessity, not because I wanted to.
So what of it?
Well, right now the two largest generations in U.S. history are pretty much living under one roof: Baby Boomers and their Generation Y kids.1
Yes, these Gen Y kids are slow to move out (and some are even now in their 30s), but it is not entirely their fault. The Millennials have been having difficulty finding work in part because Boomers are proving to be very slow at leaving the workforce. Boomers have been slow to leave the workforce because they don’t have enough money to retire because they can’t sell their houses because of the housing market meltdown and resulting Great Recession of 2008.
But that is all changing as of this writing. The housing market, once riddled by foreclosures, is improving. The dominos are starting to fall. According to the latest2 U.S. Census biannual American Housing Survey, there were almost 133 million housing units (houses, condos, and apartments) in the United States as of 2013, of which only about 75.5 million were “owner occupied,” with the rest consisting of rental units (roughly 40.2 million), seasonal (vacation) units (4 million), and vacant units (12.9 million). Considering that there are about 78,000,000 Boomers and about 84,000,000 members of Generation Y living together, and that Generation Y is starting to move out, do you think we will need more housing?
How much more housing? Twenty million more units? Forty million more units? How much?
Remember, if 2008 taught us nothing, it taught us that housing is the U.S. economy and the economy is housing. The inevitable emergence of 9 million bad mortgages in 2008 and 2009 brought down the housing industry and the United States economy, precipitating a worldwide financial crisis.
The lesson that I hope we learned? Don’t write stupid loans for folks who can ill afford the payments no matter how easy it is or how much money we are making. Wasn’t anyone watching? We paid a dear price. Now we are seeing fewer and fewer foreclosures, and a strong housing market is reemerging. And guess what? We are discovering that we may be more than just a little bit short of supply in housing.
How can this be? Do the math. Count the two largest generations ever created in America and realize, as mentioned above, that they have uncharacteristically been living together under the same roof far longer than did previous generations. These two generations are starting to part company in big numbers, and more and more of the ones moving out are going to need housing.
The average age for first marriages in the United States is right around 26 to 29 years old. Generation Y is currently aged 13 to 32, and they are starting to get married in big numbers.
Don’t believe me? Try to rent a hall on a weekend or find a caterer who isn’t booked. It has started. Remember that the footprint of the services to meet the needs of newlyweds had adjusted to meet the needs of Generation X, with its much smaller birth population and economically challenged (for the most part) immigrant population. Well, now that footprint is about to get a lot bigger.
I bet you are all thinking about business opportunities. There will be so many, it will make your head spin. Weddings are just the beginning. What about household items? Appliances? Furniture? Strollers? Lawn mowers?
What about houses?
The idea of single people in their 20s living with their parents might have become almost commonplace over the past ten years or so, but I do not think the same will hold true with couples in their 20s and 30s living with one set of parents. For many couples, seeing the in-laws on holidays is tough enough. Living with them? Forget it!
Generation Y is already driving an upswing in housing. Consider these headlines from news articles written over the past two years:
“Millennial-Driven Housing Boom on the Horizon”
“How Millennials Could Be Housing Market Heroes”
“3 Reasons Millennials Are Driving the Housing Market”
“Millennial Generation Key to Housing Market Future”
Now here’s a 2009 headline from The Age Curve Report, a demographic-based newsletter my colleagues and I used to produce:
“Gens X and Y to Spur Housing Recovery”
How about that? My colleagues and I called the Gen Y–induced housing market upswing some five years before just about everyone else. How did we do it?
And you did immediately respond “demographics,” right?
OK, so that article was written in May 2009, one month after the release of the lowest monthly housing starts recorded since 1959. Housing starts that pointed to an annual rate of about 458,000, far below the nation’s average annual for that time of about 1.6 million starts. We were pretty sure the bottom was near and that our take on the influence of demographics was going to make us look like geniuses.
And we were.
But a quick question for your consideration. Why would we have attributed the recovery in part to Gen X?
Anyone?
This was perhaps a tougher question than usual, but if you were reading carefully, you might recall from Chapter 8 that the second half of Gen X was marked by a significant increase in their numbers by birth. And with these younger—and more bountiful—members of Gen X starting to pass through their key first-time home-buying years, we felt that they would be first to help spur the recovery, followed immediately by the oldest (and more numerous) members of Gen Y as they hit their key first-time home-buying years.
And they did and have been, though admittedly not quite as quickly or robustly as we had forecast back in 2009. While we were thinking full recovery in two to four years, annual starts still haven’t gotten back to the historical annual average, which is currently pegged at just below 1.44 million. But they are in a rising trend, as are other indicators of the economic health of the nation’s housing sector. Combine this with the increasing numbers of Gen Y members who are in the midst of their key first-time home-buying years, and you’ve got a recipe for a healthy and growing housing market. And yes, I believe one that can surpass the previous 2.4 million peak for annual housing starts that happened in 1972. That peak, by the way, seems to have been caused in part by the first crop of Boomers—such as myself—reaching their key years for first-time home-buying.
As indicated by those recent headlines, I’m not alone in my prognostication for an oncoming healthy Gen Y–inspired housing market.
In fact, the National Association of Realtors (NAR) conducted a large survey—Home Buyer and Seller Generational Trends—that determined that Gen Y (which it delineates as having been born between 1980 and 2000) constituted the largest share of both overall home buyers (35 percent) and first-time home buyers (67 percent) in 2015.
The Demand Institute believes that Millennials are on the cusp of having significant influence on the economy and housing market. According to the institute’s report—Millennials and Their Homes: Still Seeking the American Dream—Gen Y households will be spending more on a per-household basis than any other generation by 2018, and that between 2014 and 2018, Gen Y will spend $1.6 trillion on home purchases and $600 billion on rent. As of 2014, the think tank estimated that 13.3 million families are headed by Generation Y, a figure it expects to grow to 21.6 million by 2018.
While the older members of Generation Y have been tagged with the image of urban-dwelling hipsters with little interest in possessing things like cars, boats, and houses, a number of recent surveys point to Gen Yers being more like earlier generations in their desire for home ownership, if not even more eager to attain home ownership than the preceding generations. And while some Millennials aspire to the hip urban lifestyle, the surveys suggest that the bulk of this generation is much more interested in the typical suburban style of home ownership, with lots of space, safe streets, and expectations of a short drive to access most suburban amenities—
Wait a minute!
Short “drive”?
You didn’t think Gen Y liked cars, did you? (More on this in Chapter 21.)
Not only do the recent surveys and research point to an elevated interest in home ownership by Gen Y, but these studies suggest that Gen Y home ownership already surpasses that of previous generations when they were at this age in their generational lives. Research by Zillow, an online real estate and rental marketplace, suggests that married Millennials already own homes at a rate close to or above historical norms for their demographic. If the generation’s marriage habits were similar to previous generations, with more marriages sooner in life, Zillow estimates that Gen Y home ownership would be six percentage points higher than it currently is, and roughly the same as the rate for the same age cohort in the 1990s. Zillow also believes single employed members of Gen Y have a home ownership rate slightly above their counterparts from the 1970s, 1980s, and 1990s.
The previously mentioned Demand Institute survey3 came up with similar conclusions. The survey, which examined how members of Gen Y were able to purchase homes and cars despite such high levels of student loans debt, determined that almost 40 percent of the oldest members (aged 26–31) of Gen Y who graduated college and have no student debt are current homeowners. Only 19 percent of college grads with student debt from the same age cohort are current homeowners, while 24 percent of non-college grads of this cohort are homeowners.
This survey concluded that the Gen Y desire for home ownership is especially strong but that turning the dream into reality is difficult for those under large student debt loads. The institute believes that the creation of “alternative mechanisms,” such as lease-to-own finance models, presents “a significant innovation opportunity in both the business and public sectors.”
Overall, research and surveys seem to indicate that Gen Y home ownership at this point in the generational time frame would likely have far surpassed all other generations if not for three key factors: economic impacts from the Great Recession of 2008, delay in the traditional years for first marriages, and high student loan debts. I am not sure that this means there’s the equivalent of a tidal back surge, and that as these three factors play themselves out the surge will be released like from the opening of a dam and allow Generation Y to overwhelm the housing market like a tsunami.
Nope, I am not going to specifically say that, but Gen Y is definitely going to have an impact. Perhaps like a tidal storm surge, or maybe like a mini tsunami, and Gen Y could even surprise us by blowing the housing market wide open like their Boomer parents did in the 1970s and 1980s. Whichever outcome, it’s already starting and will be upon us soon. So prepare, and figure out how to best profit from it.
So what of the other generations? What is their likely impact on the housing market?
Come on, you’re a demographer now, aren’t you? You can tell me how the other generations will influence the housing market going forward. Let’s start with:
The G.I. Generation:
And you would be correct if your first response is that the G.I. Generation has effectively aged out of the housing market. Those who remain are most likely residing in assisted living facilities (if they can afford it) or are being cared for by other family members or “friends.” Their needs are pretty much constrained to nursing and medical care and leave no room for consideration of housing or housing-related services.
Silent Generation:
In terms of housing, this generation is still a “mixed bag” (there’s a phrase from the 1960s!). At the older age range, their current status is probably similar to the G.I. Generation survivors. At the younger end of the age range, their housing status is more mixed, with some aging in place in their own homes and others downsizing to “active adult” communities. Some of them are still moving to warmer climates and seeking states where retirement living is cheaper. And, yes, some of these older people are moving in with other family members.
In terms of their impact, this generation continues to contribute in a small capacity in new home purchases, renovations, furnishings, home services, and the like, but perhaps not to an extent at which its housing activity could make or break the market. But then again, the National Association of Realtors survey determined that members of the Silent Generation constituted 9 percent of all home buyers in 2015.
Baby Boomers:
You now know enough about demographics and the Boomers to tell me how the aging Boomers might impact the housing market. I mean, the Silent Generation isn’t going to “make or break” the housing market, but how about the Boomers? Can they still make or break it?
Of course they can! They’ve been making and breaking markets since they were born, so why should that change now? In fact, they’ve pretty much influenced the direction of the housing market ever since their G.I. and Silent Generation parents started building and buying homes designed on the Levittown model, in large part to accommodate their growing brood of Boomer kids. Think about it: Back when the first Baby Boomers were turning 10 years old, the average size of a single-family house was less than 1,000 square feet. This average grew to 1,500 square feet by the mid-1970s, and to just over 2,200 square feet as of 2010. Think the Boomers were largely responsible for this rise in housing size? Heck, those suburban starter castles that began sprouting up like mushrooms in the 1980s practically scream “Baby Boomer.”
So what do the Boomers want and need out of housing now as they reach retirement?
Well, given that Boomers likely experienced the most financial pain during the housing bust with the loss of significant home equity, those Boomers planning a retirement-based change in housing just want to see the recouping of some of their losses and a widening of their economic options. And with so many options, there is no single answer as to how Boomers will affect the housing market going forward. Meanwhile, they are still very much in the market according to the National Association of Realtors survey, what with their share of 2015 home buying pegged at 31 percent.
It is estimated that Boomers are hitting age 65 and retiring at a rate of about one every ten seconds. A good number are still trying to recoup the losses from the Great Recession and will keep working and remain in their current castle. But in the coming years, a large number of these Boomers will end up making a move. Some will want to move closer to their children. Some will want to move to the less congested and more bucolic country, while others may opt for the cultural and gourmand offerings of the city. And a few will opt for the conveniences offered by adult retirement communities; however, surveys consistently show that only about 10 percent of Baby Boomers are making plans to move into such retirement communities. Nevertheless, as Boomers keep aging, more and more of them will need the services provided by such “assisted living”-style retirement communities.
As with previous generations, many will undoubtedly want to relocate to warmer climates and places where their retirement dollars go further. And the South and warmer areas of the West will be the beneficiaries of these moves. Remember what I told those Florida municipal workers in Chapter 1? Well, housing in Florida is back—perhaps not with a vengeance, but there has been steady and healthy increasing growth in housing starts since 2013. Economic forecasts suggest that this growth will continue to pick up steam in the coming years. While retiring Boomers are not the only driver of this growth, they are undoubtedly having an impact, especially on the Florida condo market, as surveys suggest that many Boomers will seek the ease of condo living when they downsize.
And while other Southern states are drawing in retiring Boomers, Florida holds an ace in its hand because of its lack of a state income tax. In fact, a study by Watchdog NY determined that roughly 40 percent of taxpayers who move out of New York relocate to Florida. This same report determined that in one year—2012—New York lost more of its Boomer population to out-migration than any other state in the nation.
Retirement-friendly Western states may also see a Boomer-enhanced housing boom. A 2014 survey by the California Administration on Aging determined that 44 percent of its Baby Boomer population plans to “move out of state after retirement,” with Florida, Texas and Arizona considered top destinations, according to California Realtors.
All of this indicates that Boomer impact on housing might be more regionally specific than it has been in the past, with warm-weather states likely to receive the biggest Boomer-induced boost to their housing markets.
Generation X:
Based on what you’ve learned so far in this book, what can you tell me about Generation X and the housing market? Care to make any speculations? How about their share of recent home-buying? How much of a difference do you think there is between Gen X’s share and that of the generations that bracket it?
If you guessed that its share is lower, you would be correct, so well done. In fact, according to the NAR survey, Gen X’s share of home-buying in 2015 was only 26 percent. But why the difference given that Generation X’s population numbers are roughly in line with that of Generation Y and the Boomers?
And that was a trick question to see if you’ve been paying attention. If you have, then you might have answered that Gen X’s population numbers may have been boosted by immigration; however, first-generation immigrants’ economic power is generally much lower than that of native-born Americans. That’s a good answer from a demographer, and one I believe to be true, but there are other factors at play, as you’ll see in the paragraphs to follow.
By chance did you wonder if Gen X’s diminutive birth numbers might have caused a sinkhole of sorts that may have contributed to the housing market collapse?
Given that the collapse happened just when Generation X reached the peak home-buying years, I have certainly wondered as to the possible extent of their impact. Think about it: In 2008 the leading edge of Baby Boomers who were just bumping up against retirement age decided to sell their large “starter castle” homes at the height of the real estate bubble to maximize the recovery of their equity. However, Boomers soon discovered that there was not a sufficient market to buy them. The younger generation following, and most likely able to afford the castles, were 9 million fewer by birth, resulting in a deficit of people needed to purchase these homes at the level necessary to sustain the market. Add in some skullduggery, bad decisions, and greed by the banks, rating agencies, and regulators and you’ve got a recipe for disaster, which was then duly baked.
So of course Gen X did not outright cause the housing crisis and ensuing crash, and I have not seen any research or reports that point to Gen X as culprits; however, like me, others do speculate about the generation’s role in the crash.
Interestingly, the largest percentage of households that ended up in foreclosure belonged to those in Generation X,4 and Gen Xers currently make up the largest proportion of people now renting-but-used-to-own. According to Harvard University’s Joint Center for Housing Studies,5 home-ownership rates for the 35–54 age range Gen X currently sits within have dropped the most of any age group since 1993. Prior to the crash, the Census Bureau determined that people within the Gen X age range 25 to 34 had the highest rates of home ownership for that age group since it began collecting that data in the early 1980s.
The Harvard center does not foresee Gen X being especially active in the near future with regard to home-buying, due to stagnant wages, bad housing crisis memories, and high rents, which make it harder to save for a down payment. While the center expects some Gen Xers to move back into home ownership, it expects that members of Gen Y will have a bigger impact on the housing market as they continue to enter the job market in large numbers and build their careers.
Generation Y:
As we have already discussed Gen Y’s potential influence on the housing market, we will move right on to:
Generation Z:
Who knows what this generation will want in a home—as of right now the best guess would be houses made out of Legos.
Given the not-so-far-in-the-past collapse of the housing market, should I even bother to suggest investing in the sector? Is what you have been learning about demographics, strong enough to override whatever fear you might have with regard to investing in what some would still consider a risky sector? Or, recent history aside, do demographics support investments in the housing sector?
Before considering demographics, understand that the housing market in total roughly represents more than one-fifth of the country’s GDP, and thus is one of the major sectors of the economy. As such, inclusion of housing-related investments should make up at least part of any well-balanced portfolio.
As for the demographics, Generation Y is looking like a tsunami. However, with regard to the housing market, a portion of this tsunami’s power is needed to fill a sinkhole. Thus, the demographics point to mixed performance in this sector. Additionally, I should point out that many housing-related companies have recovered from the collapse, and of this writing it seems that some housing market stock prices may be getting ahead of themselves as they climb back toward the highs seen prior to the crash, and a few even far exceeding those highs. So, be wary.
A few of the bigger Wall Street names in the housing market sector include:
Lennar (LEN)
KB Home (KBH)
USG Corp. (USG)
D.R. Horton Inc. (DHI)
Masco Corp. (MAS)
Continental Building Products, Inc. (CBPX)
Home Depot (HD)
Lowe’s (LOW)
Sherwin-Williams (SHW)
Whirlpool (WHR)
The dividend yields of these particular housing market–related stocks are not especially generous, and several appear to be over-valued, though this is based on only a cursory examination. There are dozens of other companies out there that may be worth a look.
You might also want to consider real estate investment trusts (REITs), which tend to offer higher-than-average dividend yields. However, be advised that when REITs go south, they tend to fall harder, faster, and further than other stocks.
A couple of names to look at for your initial research could include:
Duke Realty (DRE)
Highwoods Properties (HIW)
Franklin Street Properties (FSP)
First Potomac Realty Trust (FPO)
Redwood Trust (RWT)
With the exception of HIW, prices for the REITs above seem relatively cheap when compared to their valuations prior to the market meltdown. There are a couple of dozen other REITs that could be examined as well.
Finally, please repeat after me: “Conduct your own due diligence.”