July Article of the Month: Boomers retire, and California trembles

The Baby Boomer generation will soon begin retiring en masse, bringing about a radical change in California real estate transactions. This article explores the repercussions of that great demographic shift.

Data courtesy of the US Census Bureau

Boomers retire, and California trembles

The Baby Boomer generation will soon begin retiring en masse, bringing about a radical change in California real estate transactions. This article explores the repercussions of that great demographic shift.

The two charts above track, respectively, homeownership by age in the western census region and California’s population of citizens aged 65 and over. In combination, these two charts tell us about the future direction of real estate ownership and sales transactions among the rapidly growing population of California’s senior citizens.

Retirees move real estate

At about the age of 65, the California work force begins to capitalize on the benefits of social security, Medicare and years of saving, and the vast majority stop working full time. The decision to retire is often swiftly followed by a series of lifestyle changes, as the retiree takes advantage of his newly increased liberty and accumulated financial power.

One of the most significant of these changes is very frequently the sale of the retiree’s current home and the corresponding move to a new, more compact and centralized residence in a location with a better year-round climate or one that is closer to the family. As California’s population continues to age, the population of senior citizens will grow dramatically, and will exert increasing influence over both the housing market and every other aspect of the California economy.

Senior citizens, specifically retirees, are one of first tuesday’s 26 Factors Affecting Real Estate in California. Citizens aged 60-69 are more likely to own property than any other age group, as displayed on the first of the above charts.

The accumulated equity in their homes, combined with their savings from a lifetime’s employment, allows them to exert a disproportionately strong influence upon the housing market statewide. When these citizens begin, as they will, to change their spending and living habits in retirement, they create new opportunities for multiple listing service (MLS) brokers and agents who market single family residences (SFRs).

The number of people in California aged 65 and older is displayed on the second of the above charts. This rapidly growing segment of the population is traditionally made up of the retired and soon-to-be retired.

Over the past twenty years, retirees have exerted minimal influence in real estate transactions, as the age group of citizens over 65 was comparatively small. The generations born between 1915 and 1935 – during the Great Depression and World War II – did not have the numbers necessary to remold the housing market in their own image. That is about to change dramatically, as the above population chart demonstrates.

As the massive Baby Boomer generation, defined by the US Census Bureau as the generation born between 1946 and 1964, begins to retire en masse (a process which will start in 2011), every aspect of the state’s economy will be changed. The Boomers, the largest single age group in California, have spent the last 30 years accumulating their wealth (primarily in the form of stock – not cash) and generally living in large, suburban SFRs.

Although the Great Recession wiped out some of these 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, in a massive geriatric shift, “dis-savingThe act of cashing in savings and liquidating assets to spend on goods and services.” will be a collective act. They will liquidate their funds, 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 recent economic collapse. Many seniors held the majority of their wealth in the form of paper – stocks – and saw much of it erased overnight in the stock market crash of 2008, turning their 401Ks into 101Ks.

However, boomer retirements were merely postponed, not canceled. Now that the stock market has rebounded slightly, and home prices are beginning to bottom out, retirees will likely regain most of their pre-recession confidence, and perhaps some of their spending habits as well.

Following 2013, property prices will start to rise, but the rate will not likely exceed the rate of inflationThe price changes over time in consumer goods and services, quantified in the consumer price index (CPI).. This positive movement will ameliorate the fears of most retirees who seek to relocate. The shadow inventoryProperties available on the market through the multiple listing service (MLS).The inventoryProperties available on the market through the multiple listing service (MLS). of properties whose pending release onto the market (e.g., REOs, foreclosures) impacts the stabilization of real estate prices and volume. of retirees will thus manifest itself, sooner rather than later, and will be a key factor in clearing out the current rigor mortis of the housing industry. They want to sell and relocate, and most will buy; more than 70% will probably acquire a more modest (if not necessarily less expensive) residence.

History repeats itself for Boomer generation

The impending increase in suburban SFR home sales among senior citizens will keep housing prices depressed, limiting the gain Boomers will take on a sale. By now, this is a story that their generation knows all too well.

Thanks to their overwhelming numbers, the boomers went to school in temporary grade school and high school buildings; they all hit the job market within too short a period of time 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 within only 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 overbuilding hit the home market by the end of the 1980s, for the same reasons, and was accompanied by a boom in housing prices which ended with the 1990 recession. [For more on overconstruction of SFRs and multi-family units, see first tuesday’s Market Chart, CA Single- and Multi-Family Housing Starts.]

In the later 1990s the boomers began in earnest to invest their accumulating wealth in the stock market, generating a stock pricing bubble in the process. The ensuing collapse of their financial empires has wiped out much of this wealth, but the boomers will soon begin to sell off the considerable amount they retain, a process called dis-savingThe act of cashing in savings and liquidating assets to spend on goods and services.. Such assetA valuable item which can be converted to cash by its owner. reduction will continue for the next 20 years, and will kill any movement in the stock market (current rises in stocks are merely the result of speculation due to historically low interest rates in relation to inflationThe price changes over time in consumer goods and services, quantified in the consumer price index (CPI).. Billions of dollars in cash is currently waiting in huge investment funds to be invested when the economy recovers, and current low inflationThe price changes over time in consumer goods and services, quantified in the consumer price index (CPI). rates cannot last more than a few more years.).

Historical trends will prove true now, as well, as the Boomers sell their current homes, looking to find new properties and live freer lives. The first Boomers to retire, those on the cusp of the population boom, have somewhat higher average earnings than those Boomers 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 be put at a greater disadvantage by 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 the 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 replacement homes which are more desirable to retirees. 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.