Back in March, 2013, an intriguing article appeared in The Atlantic Cities called "The Great Senior Sell-Off Could Cause the Next Housing Crisis." Author Emily Badger interviewed demographer Arthur C. Nelson, a professor at the University of Utah and director of the Metropolitan Research Center there. Nelson basically argues that by 2020 the supply of homes for sale from downsizing baby boomers will begin to overwhelm the demand for their homes. Mismatches in preferences (baby boomers bought extremely large homes) and declining median household incomes (from an American public education system continuing to suffer from severe "achievement gaps") will drive the imbalance between supply and demand. By the time these motivated sellers reach a very advanced age (like 80 and up?), they will finally just walk away from the homes they are unable to sell, leaving behind plummeting values in contracting or otherwise stagnant cities. Nelson calls this dynamic the "Great Senior Sell-Off."
Despite the doomsday possibilities, Nelson acknowledges that growing metro areas will not experience this sell-off debacle because the demand will exist to absorb the supply. So, to me, the worst case scenario abut downsizing baby boomers is that they may hasten the decline of already dying cities and/or regions. The best prescription for such areas is to figure out how to stoke economic growth, the same thing any city or region always tries to do. Moreover, the calamity in one region or sector of the economy could translate into a boom elsewhere. The seniors who can afford to leave behind homes (a prospect I still have a hard time believing) will generate economic opportunities in rental markets or retirement and assisted living centers set up to cater to their needs.
Nelson's research seems to rely heavily on a 2007 paper in the Journal of the American Planning Association called "Aging Baby Boomers and the Generational Housing Bubble: Foresight and Mitigation of an Epic Transition" by Dowell Myers and SungHo Ryu. In this paper, Myers and Ryu make an intuitive conclusion about the impact of an aging population that aligns with what I consider the absolute worst case scenario regarding the Senior Sell-Off:
…it is a mix of the coldest, most congested, and most expensive states, rather than high-growth states of the South or West, which we expect to lose older homeowners most rapidly. Of greatest importance is whether a state has a growing or static population of young adults to absorb the homes its senior population will sell.
Myers and Ryu estimate that "…the ratio of seniors to working-age residents [will grow] by roughly 30% in each of the next two decades." The coming crisis is a simple numbers game given senior citizens are net sellers of housing. As planners, the authors are focused on the levers available to city/region planners to mitigate the coming crisis. Again, it is a simple numbers game: retain the elderly and promote immigration to replace departing seniors. Since we all eventually die, retention of the elderly (and keeping them in their homes) is of course only a temporary solution.
Myers and Ryu wrote their paper at the very edge of the economic precipice that preceded a financial panic and recession. They argued that "…the United States is currently experiencing a short-term housing market bubble that is nested within a longer-term, generational housing bubble of greater magnitude." Without anticipating the severity of the coming collapse of the "short-term" housing bubble, I think the authors over-inflated on a relative basis the seriousness of the larger, generational bubble. Here is what they said about the possibility of lower housing prices:
If prices fall low enough, home buying rates may rise, sellers who are able to remain in their homes may decide to keep them, and investors may step in to claim some properties. If prices fall we also expect home builders to scale back on construction, reducing the growth in supply. The question is whether these adjustments will be sufficient to cushion the baby boomer sell-off.
With hindsight, we now know some answers: investors and cash buyers descend in droves upon collapsed housing markets with particular concentration in areas where the economy is most likely to revive the fastest; and homebuilders quickly retrenched in response to the collapse, causing what is now in 2013 a growing supply shortage in the hotter markets. If a baby boomer sell-off is currently unfolding (Nelson points to a few more years down the line), we certainly cannot see it through the fog and uncertainty of the on-going post-bubble adjustments.
Since Myers and Ryu did not consider the immediate bubble as serious as the generational bubble, they somewhat conflate the two in terms of predicting the likely start of a Senior Sell-Off:
If the elderly are more often home sellers, and are more numerous than the young who are buyers, a market shift could come on quickly after 2010, causing housing prices to fall. Even if prices remain flat, without the investment incentive young households will likely slow their entry into homeownership, worsening the imbalance between sellers and buyers. Once past the tipping point, market adjustments will cascade in virtually every community, as the ratio of seniors to working age adults will increase for the greater part of two decades.
Now, in 2013, rather than worrying about selling seniors pressuring almost every city in the country, we are a lot more worried about keeping people of all ages in underwater homes, preventing foreclosures, and generating momentum for a housing market finally moving off a bottom.
The "affordability barrier" for younger buyers that Myers and Ryu feared has been generally swept away by the crash of the housing market although it has left even more serious economic dislocations in its wake. In fact, tightening credit conditions are more of a barrier to younger buyers right now. Nelson's prediction of a calamity starting around 2020 is informed by the financial crisis, but it too may get derailed by as yet unforeseen major economic/political events. For example, immigration reform may become a reality soon and could transform the country's immigration system, paving the way for improvements in education and removing some of the economic dysfunction in some immigrant communities. Nelson identifies the dysfunctions as drivers of sub-par performance for median incomes. Moreover, an influx of well-trained and highly skilled immigrants could create an economic resurgence whose contours are difficult to predict at this point.
Interestingly enough, Myers and Ryu demonstrate their recognition of the importance of immigration to America's housing market:
Per capita rates of homeownership rise dramatically as immigrants reside longer in the United States, and immigrant populations are growing faster than native-born populations (Myers & Liu, 2005). As a result, the foreign-born share of the increase in homeowners has roughly doubled each decade since 1980, rising from 10.5% in the 1980s, to 20.7% in the 1990s, and 40.0% in the period 2000 to 2006 (Myers & Liu, 2005, Table 2). These shares are even higher in several states, exceeding 60% in California, New York, New Jersey, Massachusetts, and Illinois, and they will climb much higher after the baby boomer sell-off commences. It is immigrants who will lead many markets out of the current downturn in home sales and prices.
I think these data alone are sufficient for plenty of optimism that the American housing market (and economy) will prove resilient in the face of an aging and downsizing baby boomer population. In fact, it perhaps may be more important to consider some future consequence of a shrinking immigrant population rather than the direct impact of selling baby boomers. That is, the demand side may prove much more important than the supply side. Nelson fears that the stock of homes seniors have to offer will not match the preferences of following generations, but this mismatch may create more of a crisis for those individuals who want to sell but cannot. The decline in value in these homes may never "infect" the value of the homes people do want to buy (or rent).
Myers and Ryu also cite the infamous doomsday housing predictions of Mankiw and Weil (1989) as a tale of caution about the methodology used to make long-term predictions in the housing market based on demographics:
Mankiw and Weil (1989) predicted a 47% decline in house prices during the 1990s, based largely on their modeling of declining demand as baby boomers aged. Instead, we have seen baby boomer demand for housing grow and prices double. Housing economist Karl Case recently called the Mankiw-Weil prophecy 'one of the worst forecasts in the history of mankind' (Carmichael, 2007, p. 2). Their approach used cross-sectional analysis improperly to predict trends for age cohorts. Although economists have avoided long-term forecasts since Mankiw and Weil's experience, longitudinal inferences about housing demand can still be made with cross-sectional data if we are careful (Myers, 1999). Indeed, planners should attempt careful, forward-oriented analysis so as not to make major policy errors and to avoid either undue pessimism or unwarranted optimism (Krainer, 2005).`
The prescription to be "careful" and to walk the fine line of sobriety that lies between "undue pessimism" and "unwarranted optimism" is of course good advice, but it does not eliminate the fundamental reason why economists have now seemingly decided to avoid these kinds of forecasts: the number of variables is great, uncertainty is high, and, most importantly, the American economy has proven time and time again to be incredibly resilient, responsive, and flexible. Nelson himself says it best at the end of a presentation dealing with the Senior Sell-Off titled "Resetting the Demand for Multifamily Housing: Demographic & Economic Drivers to 2020" when he cautions: "We don't really understand where we're headed." (This presentation contains Nelson's data and approximate quantification supporting his theory of the Great Senior Sell-Off).
In fact, plenty of literature and research exists based on previous generations of seniors suggesting that we need not fear selling seniors. This body of work suggests that seniors are inclined to remain in their homes unless or until a "precipitating shock" forces them out. The desire to keep a house as a buffer against financial and medical contingencies as well as the desire to pass on housing wealth to future generations (a bequest) is another motivation for keeping a house as long as possible. Even surveys from the AARP suggest that seniors are not likely to precipitate a broad and generalized housing crisis. Here are some results from the "Home and Community Preferences of the 45+ Population - 2010":
Seventy-three percent of the respondents from the AARP and GfK Customer Research North America study stated they strongly agreed with the statement 'what I'd really like to do is stay in my current residence as long as possible.'
Respondents who indicated their desire to live in their current house agreed they liked what the community had to offer (65 percent) and that they were financially unable to move (24 percent).
Sixty-seven percent of respondents agreed that they would like to remain in their local community for as long as possible.
I will cover more of the counter-evidence for the Great Senior Sell-Off in a part two to this piece. (I also appreciate any feedback that will help inform the next piece on this topic.)
Be careful out there!