Real Estate, Boomers And The Fiscal Cliff

by: Acting Man

By Ramsey Su

The baby boomers are credited for being responsible for the long period of growth and prosperity of this country. Now that they are starting to reach the twilight of their most productive years, it is only logical to examine how they may impact the future economy. Here is a good, though dated, article by PEW Research Center that provides plenty of data and links about the boomers. As usual, I am only focusing on the real estate related issues.

We should look at the numbers and take a stab at how this age group is expected to behave.

The numbers are actually quite simple. Per the 2010 Census Bureau data, there are about 81 million of these boomers. Every day, about 10,000 of them reach the commonly accepted retirement age of 65. The trend is somewhat bothersome. In the last census decade, the boomer population grew the most, by almost 20 million or 31%. In contrast, the group that is going to support the boomers -- the 24-44 year old cohort -- actually declined by 2.9 million or 3.4%.

When these boomers watch yet another guru on CNBC opining that investment is for the long term, they know it does not apply to them. For them, the long term is now. They do not care about the nation's debt ceiling, they have their own debt ceiling to worry about. They do not care about underfunded pension plans, as long as there are enough funds for them. They do not care about social security contributions, they only care about distributions. They are all asking themselves the same question: What are they going to do with the rest of their lives, and more importantly, can they afford it? They are facing their personal version of the fiscal cliff, aka the retirement budget deficit.

Imagine there is a housing turnstile that everyone reaching 65 must pass through, so we can evaluate their housing related decisions for the near future, say the next five years.

Let us first look at the top tier, those who have adequately planned for their golden years. There is no evidence that this group is doing anything unexpected. There is no manic buying of second homes, nor is there any panic selling. Their activities are inconsequential to the housing market.

Let’s switch to the other extreme, the bottom tier. These are individuals who are still renting, some perhaps by choice, but most are likely doing it due to financial reasons. If they have not made a purchase by now, chances are they may be renters for life. As they age, will they be creating a negative demand for housing? Are they candidates for multi-generational family households? Regardless, this group is not likely to add to demand for home ownership.

Now imagine as the next group at the turnstile those that are hopelessly struggling with a negative equity mortgage. The government is trying to sucker them into a modification with loan terms far beyond their life expectancy so they can be mortgage slaves to the grave. The correct action is probably default. Save a few years of housing expenses. Then negotiate a short sale. Retire to the location of your choice, go on a cruise and live happily ever after as a renter. Instead of being locked in a house that belongs to the bank (or Bernanke, since he is buying up all mortgages), these boomers can move closer to family, grand kids or even move in with them. They can move closer to health care centers, or golf courses, or ski resorts. I believe this trend will start as many more boomers face tough financial choices in their not so golden years.

Next, imagine the group that has equity, but at the age of 65, they were just enticed by Bernanke to refinance into a 30-year mortgage because rates are so low. Now at retirement, what they thought was a comfortable debt to income ratio just went through the roof with the diminished retirement income. They have a choice of using that equity to augment a desired lifestyle or sacrifice their golf membership so they can keep the house.

In summary, without a precedent, it is impossible to precisely quantify the boomers' effect on the future housing market, but it is unlikely that this group will be a net contributor to housing demand. As 10,000 stand in line at the 65 year-old turnstile every day, the pressure they exert on housing is down, not up. All analysis that is using the same metrics that were employed in previous decades to determine future housing demand is simply useless.

The market is making a lot of noise, mostly in response to wild and crazy government interventions and Bernanke’s QE operations. I know it is holiday season, but celebrating the housing recovery may turn out to be way premature.