Although the Great Recession wiped out some of their savings and put a few of these SFRs on the market (or in foreclosure) before their time, the majority of the Boomers are still on the brink of retirement. When they do retire, “dis-saving” will be a collective act. They will liquidate their stocks, sell their current homes and embark, unfettered, on the next stage of their lives.

The impending wave of retirees has been briefly delayed by the Great Recession. Many seniors held the majority of their wealth in the form of paper – stocks – and saw much of it erased overnight when the stock market crash turned their 401Ks into 101Ks.

However, Boomer retirements were merely postponed. Now that the stock market has largely rebounded and home prices have bottomed out, retirees will soon regain their pre-recession confidence and perhaps some of their spending habits. [For current information on the state of the stock market, see the first tuesday Market Chart, S&P 500: Stock Pricing Vs. Earnings.]

Following 2013, property prices will start to rise, but the rate will not likely exceed the rate of inflation. This positive movement will ameliorate the fears of most retirees who seek to relocate.

The shadow inventory of retiree homes for sale will thus manifest itself sooner rather than later. Those homes will be key factors in the elimination of the current rigor mortis in the housing industry. Retirees generally want to sell and relocate, and most will buy new SFRs; likely more than 70% will acquire a smaller (though not necessarily less expensive) residence than the one they have left.

History repeats itself for Boomer generation

The impending increase in suburban SFR home sales among senior citizens will keep housing prices in outlying bedroom communities depressed, limiting the gain Boomers take on a sale. This is a story of supply and demand economics that their generation knows all too well.

Due to their overwhelming numbers, the Boomers were educated in temporary grade school and high school buildings. They all hit the job market within too short of a time period and salaries dropped accordingly. When Reagan fired all the Federal Aviation Administration (FAA) tower traffic personnel, he was able to replace them with equally good and well-educated talent in just a few days.

The Boomers began renting apartments simultaneously in the early 1980s, driving up rents and leading to massive apartment overbuilding, which took more than a decade for the market to digest. A similar problem of SFR overbuilding erupted by the end of the 1980s for the same reasons, and was accompanied by a boom in housing prices ending with the 1990 recession. [For more on over construction of SFRs and multi-family units, see first tuesday’s Market Chart, CA Single- and Multi-Family Housing Starts.]

In the late 1990s the Boomers began to invest their accumulating wealth in the stock market, which generated a stock pricing bubble. The ensuing collapse of their financial empires wiped out much of this wealth.

Soon the Boomers will begin to sell off a considerable amount of the stock they still retain. Such asset reduction will continue for the next 15 years and kill any movement in the stock market. Current rises in stocks are the result of mere speculation due to historically low interest rates in relation to inflation. Billions of dollars in cash is currently waiting to be invested when the economy recovers and current low inflation rates melt away in 2013 or 2014.

Historical trends in Boomer conduct will also prove true now as retirees sell their current homes, looking to find replacement properties and live freer lives. The first Boomers to retire, those on the cusp of the population boom, have somewhat higher average earnings and savings than those who will follow. Consequently, the retirees of 2008-2017 will have the most money to spend, and will often have a second or third home to live in or sell.

Those retiring after 2018 will (generally) have somewhat less money, and thus less purchasing power upon their retirement. Those who retire later will also have a greater disadvantage due to the competition from other retirees in their generation. The homes they sell will fetch lower prices, the urban condos and retirement-community dwellings will be full before they arrive and prices will be rising.

The price reduction of large suburban SFRs caused by Boomer home sales will be further aggravated by a corresponding rise in the values of the more desirable replacement homes in near urban centers. While we cannot predict with certainty which properties will be involved or just where they will be, historical and current trends give us some hints.

Relocation: where will they go?

Homeowners in California do not tend to rent upon retirement, as shown by the first chart above. In fact, homeownership for those aged 75 and older remains 16% higher than for any age group under 50. Moreover, the percentage of citizens owning homes over the age of 75 grew even through the recession,, and is currently near its highest level since 2002.

Homeownership is a well-entrenched habit among the Boomer generation; a fact not likely to change because of increased age. However, this does not mean retirees remain stationary.

Sooner or later they decide to move to a new location that has a better climate or is closer to other family members. With their collective savings and equity, most will have the resources to do so with ease.

Retirees have traditionally moved to smaller, more conveniently-located properties that are closer to urban centers. The U.S. Census Bureau reported in 2009 that approximately 11% of the population in California’s metropolitan areas is 65 or older.

To complicate Boomer relocation, the younger generation is better educated and more mobile, migrating with increasing frequency to the cities. Their parents are likely to follow. They will be attracted by the increased access to public transportation, the proximity to cultural and artistic institutions and (not least important) the closeness of their children and grandchildren.

As more senior citizens retire, interest in condos and other high-density residences that cater to the urban lifestyle will increase. Ownership of rental properties, which allow a more flexible and mobile lifestyle, is more cost-effective than ownership of SFRs and thus will most likely also see a bump. [For more information regarding the role of cities in real estate, see the June 2010 first tuesday article, The plight of California to be solved by… cities?]

As retirees begin to relocate, opportunities will arise for real estate brokers and their agents to assist.

The most directly affected housing developments will be those that cater specifically to the needs of senior citizens. California law exempts seniors-only housing developments from ordinary restrictions on age discrimination. As the demand for senior housing increases, more developers and landlords will take advantage of this exemption. The range in pricing of high-density (high-rise) housing will also work to separate the more wealthy (retirees) from the less wealthy younger generation.

Expansion of existing SFRs to accommodate new relatives-as-tenants is another phenomenon that will increase. California legislation has paved the way in this area. In 2003, the legislature required cities to permit the construction of what are generally referred to as casitas or granny flats; attached, freestanding or over-the-garage apartments with no direct access to the main house.

The construction of such a flat transforms a SFR into a two-unit property within single-family zoning, a first step in California’s more efficient use of land. Casitas are sometimes used by homeowners to gain extra rental income, but they are most often used initially as a new residence for elderly relatives or in-laws. Increased living density will thus be the case not only for cities, but also for suburban areas, which will reap the benefits of a more close-knit and energy-efficient population (namely, a better fiber of social, civic and cultural life, and the development of restaurants, theaters, bars, entertainment and specialty shops). [For more on current use of casitas and other cohabitation arrangements, see the March 2012 first tuesday article, Multi-generational housing is a temporary fix for economic woes.]

What does it mean for California brokers and agents?

The vast majority of retirees will continue to pursue some form of traditional ownership, as can be seen in the above chart of homeownership rates. As these retirees begin to relocate, opportunities will arise for real estate brokers and their agents to assist them in their transition. Farsighted hometown brokers will prepare for this migration now, offering relocation services to Boomers who move locally. The U.S. Census Bureau reports 50% of senior citizens who relocate choose to move to a new residence within the same community.

On the other hand, the impact of the geriatric shift on the sale of suburban homes in California may be ameliorated by emigration. Many retirees have historically chosen to leave California for states with a lower cost of living and a more relaxed, “retirement-friendly” reputation. Foremost among these retirement states are Florida, Texas and Arizona. Those with lower retirement pensions may relocate to Mexico.

Brokers can be of service to these sellers/homebuyers as well. They need to take the opportunity to suggest new residences in retirement-friendly communities where the broker has established contacts with cooperating brokers, and profit from fee splitting for referrals on these relocations.

first tuesday forecasts a solid return of buyers to the housing market by 2016, probably peaking between 2018 and 2021, as the next and larger generation (Generation Y) of homebuyers looks to purchase their first residence. This influx of new homebuyers coincides perfectly with the beginning of the retirement boom, which will release thousands of Boomer SFRs onto the market.

It remains to be seen whether these old, poorly constructed suburban SFRs will be of interest to young homebuyers. Signs indicate that demand, among the young as well as the old, will be for commuter-friendly property closer to the high-skill jobs and urban center culture. It will be up to cities to provide zoning for a denser population, up to builders to create these urban high-rise residences, and the duty of brokers and agents to bring them to market.