A Housing Bubble Within a Bubble

I have been sitting on the sidelines renting now since 2004 and patiently waiting, and waiting, and waiting for the right time to buy a home for my family. It has been a considerable sacrifice being a "renter" going on four years now, and my wife is getting pretty fed up (although she does logically understand the concept of leveraged losses on big ticket assets).

Well, I was beginning to get pretty excited that the return of pricing back to 2001-ish levels might be coming up pretty soon, possibly in 2009 - 2010, but then I came across another even more disturbing article "Aging Baby Boomers and the Generational Housing Bubble: Foresight and Mitigation of an Epic Transition". This excellent article, published 12/31/07 by the Journal of American Planning Association, describes what I had been thinking for some time, but had been essentially ignoring because it had not yet been quantified for me. The article describes that underlying the current housing boom (bubble) there has been a larger generational, boomer-driven demand function for housing also at work (i.e. a long-term bubble). This net-buyer phenomenon has driven an increased need for housing formation beginning in the 1970's when the first baby boomers entered the home buying age group. As more and more boomers became home buyers it fueled increased home construction and move-up purchases, driving the whole housing food chain. This article does a very good job of laying out the state-by-state demographics for when the boomers begin to retire, down-size and start becoming net-sellers of housing. There is a cross-over at about age 65 when the sell-rate exceeds the buy-rate for housing. As the first wave of boomers will be reaching that milestone in just a couple of years, it will begin to exert ever-increasing downward pressure on home prices as more and more supply comes onto the market.

I live in the Northeast and it doesn't look pretty over the next decade. Unfortunately, this has taken out a position that I was betting on, where I could buy-in relatively soon (1-2 years) and not be so concerned whether I had caught the absolute bottom of the market because the longer-term upward pricing trend would reestablish itself, so over, say, a 10-year holding period I would be fine. Now I'm not so sure. Kind-of makes you wonder what other underlying long-term bubbles might have been blown by the boomers (don't get me wrong, I do love you guys.)

Does anyone know of a good long-term family-oriented rental solution? I have yet to break it to my wife that we may be renting forever.

Resources:

Myers, Dowell and Ryu, SungHo (2007) 'Aging Baby Boomers and the Generational Housing Bubble: Foresight and Mitigation of an Epic Transition', Journal of the American Planning Association, 1 - 17

Comments

[Living Off ...:]

at some point housing will drop below replacement value, and mortgage payments will be cheaper than renting.

till then, just rent the house of your dreams for less than it would cost to buy.

2008 Feb 10 08:38 AM

[NutritionFacts:]

For Gawdsake, you can't rent forever. It's not *all* about buying at the bottom. And just thank your lucky stars that you're not looking to buy in London. You Yanks can get lovely spacious 6 bedroom houses with 3 bathrooms for peanuts; in London you can't get a 1 bed / 1bath shoebox in a decent area (of which there are not many) for less than 250K (GBP i.e. 500K USD).

2008 Feb 10 08:41 AM

[John Wake:]

Future ex-wife?

2008 Feb 10 10:48 AM

[mad jack:]

Mark,

If you have a job, have a family, can make a down payment, can get a loan you can afford, and are going to stay in same area, go buy a "home". You're reading to many articles on housing. It's always going to be something that says there is a may be a problem in the future. You what a list? Prices will fluctuate over time but your age always gets older.

2008 Feb 10 11:55 AM

[hugho:]

Mark, you have a smart head on your shoulders. Be careful where you buy esp if it's a distant suburb. When energy starts to get pricey in the next 10 years, those distant suburbs will become mighty cheap meth slums. The exodus from them could start sooner than any of us think. The first step will be declining property values, perhaps grid interruptions a la South Africa or China(I don't want no stinkin nuke or power plant in my neighborhood!!) Try to look ahead.

2008 Feb 10 12:36 PM

[Jack Yetiv:]

First, it sounds like you are renting an apartment, rather than a house. Go rent a house--your wife will get what she wants (a house) and you will avoid a possible white elephant. Second, find a house with an "option to buy." Your rent will be a little bit higher--but well worth the "option." If at the end of the option period, things become clearer and you want to buy--you have already made a downpayment. If not, you are not obligated to buy.

Having answered your question, let me now second the notion above that money ain't everything. Living in a house (a "home") where you and your family can form those Xmas memories, first bike ride (and crash), and all that can be "priceless," as the MC commercial tells us.

Jack Yetiv

2008 Feb 10 12:43 PM

[gordon:]

We are 58. The San Diego Union today boasted about Brookfield Homes planning "downsized sq footages" for affordablility. That's all well and good, except they are going to build these in existing projs, next to 3,000 sq. footers, or at the other end of the site map, so as not to burn their previous buyers! You forgot WAGES. Our son will be finding it difficult to ever match our wages, immigrants never will, largely, Mexican workers here combine families in order to buy (well, before those no-quals). We may be forced to downsize, yes, and I bet we aren't the only one's with assets allowing us to look at living in Costa Rica, or a country that isn't driven by military spending that now exceeds 50% of every tax dollar! You should wait to buy, map out the best neighborhood and drive thru there frequently looking for a distressed-divorce sale, they will be abundant in the next 2 yrs, buy a resale, good quality const/builder that is cosmetically ugly.
Renting at a good rate is smart until then. Give all the bogus bailout schemes time to prove they fail. Even freezing teasers, 80% of these losers never made the 1st payment and almost all lied about their income. Now, they'll be losing jobs on top of it.

2008 Feb 10 12:43 PM

[urbanexus:]

The impact of boomers selling off will vary by region. High growth metropolitan areas will be less affected by the boomer sell off factor, because overall demand will be higher. Similarly, areas that are attractive to retirees will be less affected by this phenomenon.

2008 Feb 10 12:56 PM

[Eric Balkan:]

I agree with many of the comments above, but want to add something I didn't see mentioned. There's a traditional rule to allocate 25% of your after-tax income to housing. With the increase in housing prices over the past 20 years, that percentage is now 40-50% for many. E.g., most Gen-Xers are priced out of the market. I expect that housing prices are likely to come down significantly, i.e., revert to the mean, to restore some balance.

2008 Feb 10 01:17 PM

[Smalltownba...:]

Are you taking a taxi to work, waiting on gas to return to $1.00 per gallon? Do you wait until food is spoiled to buy it at the bottom? Do you buy from the day old bread store? Did your wife's wedding ring come from a pawn shop? And how did you ever get married? There was always a possibililty that someone better might come along... Get off your butt and buy a house for your family. If you had done so a few years ago you might be happier and be able to move on with your life.

2008 Feb 10 01:52 PM

[Matt Blackman:]

Actually, the demographic bubble within a bubble to which you refer is one of the major causes (along with cheap money and misguided fiscal policy) of the creation of the greatest number of asset bubbles in history. But what goes up, does eventually come down. According to the work of Harry Dent, Daniel Arnold and others, the biggest spending sector of the economy (45-54 year olds) which are drivers of an economy peak in 2009. Studies show that as these individuals pass 50, spending starts to drop and since 70% of our economy is driven by consumer spending, this is a big problem. Each time this has occurred in the past (1929-30 and 1966-68 in the US and 1990 in Japan) a depression has followed (see Figure 2 tinyurl.com/3yf9rk ). Given that we are now experiencing the popping of the biggest inflation adjusted real estate bubble in history, this baby boom mass exodus has the potential to push this thing over the edge of the abyss. Imagine mass demand switching from big homes to small single level rancher style homes and condos and you begin to get the picture.
Matt Blackman - Host TradeSystemGuru.com

2008 Feb 10 03:08 PM

[Rumpole:]

Hi,What you identified is a very long-term trend. Within that trend there'll undoubtedly be periods where demand will likely push prices up. While prudence is motivating your wait to purchase, which is a good thing, the needs of your family and the on-going loss of equity might not make long-term sense. The key, I think, is to find a place that is sufficient for your family's needs that also represents good value and affordabiility. I agree with one of the previous comments about suburbs and energy; in the long-term suburbs won't be compatible/feasible with the pressures exerted by rising energy costs. So I'd also suggest that your house search also take into account energy effeciency; in other words look for homes that follow the highest possible standards for energy efficient construction. Over the years, these types of homes will likely retain their value or become even more valuable. One other thing, while the long-term trend toward decline in prices of larger homes because of boomer down-sizing might also represent a long-term trend upward in the smaller home/condo/retirement home market. Cheers.

2008 Feb 10 04:04 PM

[Jan:]

We've been looking for a long time, at least 7 years here in Florida. While my husband's salary stagnated, housing just kept going up. Finally we took on a second job and housing prices have finally at least stalled. We're looking, and will buy shortly, we want a house to live in for a long time, 30 years, not for an investment. If you're not speculating and don't have to move, then go ahead, buy. Saving money is one thing, but your wife may be having hard feelings about being married to a cheap person. Being thrifty is great, just don't loose out on life because of it.

2008 Feb 10 06:14 PM

[Carl leason:]

Mark,..There are plenty reasons mentioned above that make it reasonable to buy a house. But, first and formost, look at housing prices, inflation adjusted, for the last 100 years and the long term trend is upward about 5 pct. a year to buy a house.. , yes,..prices have come down from it's peak about 6 months to a year ago, but there are two very good reasons why this cannot continue,..We still are receiving immigrants by the 10's of thousands a year. The Mexican border is still wide open and so is S. FL to the Cubans, people are afraid to invest in Real Estate in foreign Countries because of continuing instability of foreign Governments and the foreign Gov. taking of property. That's why people may hate our Gov. but love to buy here because it is one of the few places left in the world where buying a house is a safe investment ! Housing is bargain priced now except in places like NYC or CA, etc. but most of the US has exceptionally cheap prices. Check out prices in the Heartland, like MO and tell me that prices are too high ! Also, in the Carolinas where the average Joe Blow can buy a decent house for $150,000. Housing is cheap because our Gov. policies have allowed any country esp. China to import to this country but we don't manufacture anything anymore. So, wages are low and that will keep prices low. Prices will not go up until we start exporting manufactured goods and not just agricultural products. Foreign Governments have so many paid lobbiests in Wash. DC that it's hard to find a home there also. And, unfortunately, that's the real problem, Our politians have been bought and paid for !
Until we start manufacturing products, and exporting, the situation will stay the same as it is right now....So, if you have the money ,..go buy that home, make the wife and yourself happy and in the long run, it will be worth more ! This piece from someone who has been a lic. Realtor and investor since the mid 70's ! My only regret is that I sold some really nice properties that I should have held on to. Listen to what the NAR and FAR Realtor Associations have been saying for months,...we are at the bottom now,...the only thing holding back sales in Fl is way too high R.E. Taxes and Ins. but just go one state North to GA, SC, NC etc. and you will find some increadable bargains and mild climates, great beaches, etc. and don't complain to us in the future about the opportunities you lost in the year 2008. ! LC

2008 Feb 10 08:39 PM

[GKM:]

Lots of very intelligent comments here. I second (or third or whatever) a lot of them. My two cents - definitely treat housing as an expense and consumable (but durable) good. Renting costs money and you have the trade off of not having a place to really call your home.

You should "play the spread" if you want and not go too upscale at this point. Those large homes that folks have been craving are going to be a dime a dozen in the years to come as that study indicates. The spread to smaller, fixer up homes will fall. I also wholeheartedly agree with the comments about location, location, location due to energy costs. It will be key.

Bottom line, treat home ownership as an economic least cost alternative and not an investment vehicle, and you'll be in great shape.

2008 Feb 11 10:51 AM

[Pent up demand:]

Disclaimer: I am a family man (previous owner) who is renting right now.

I am sick-to-death of the hearing the "losing equity" argument. I rent a large apartment for $2600/mo in a place where the carry on a similar size single family would be $4000/mo plus. Oh yeah, prices are falling. What the heck am I missing out on by renting? Let's see, $1400/mo in carrying cost and a nice chunk of negative appreciation.

My landlord is practically begging me to buy the 3-family house I rent in. "Great income" he says. Aw, thanks, but the reality is he's a smart money guy who missed the top and is smart enough to know that you don't get wealthy by holding assets that decline in value.

I agree 1000% with the admonition against distant suburbs. Expensive gas is going to kill those places.

Housing is not "cheap" in the heartland. It just stayed more sane than the coasts. I live on the east coast but grew up out there. When I go back to visit, I see lots and lots and lots of "dream homes" built by boomers. I hope the quality wasn't too bad; I look forward to retiring to one of those babies at a nice discount to what Mr. and Mrs. Boomer paid to build it.

2008 Feb 14 08:39 AM