Cash Buyers And Optimism Counter The Notion Of An Imminent Housing Crisis Triggered By Baby Boomers

Includes: IYR, PHM, XHB
by: Dr. Duru


More evidence that the "Senior Sell-Off" thesis is an overly pessimistic assessment of the future of America's housing market.

Cash-rich non-investors are getting more active in the housing market suggesting economically active Baby Boomers selling homes that the market is buying.

Baby Boomers committed to planning, to communal and family ties, and an active future, bode well-run counter to the notion they will trigger the next housing crisis.

Last year, I wrote a series of articles expressing my skepticism about the notion that an abandonment of homes by incapacitated Baby Boomers would cause America's next housing crisis (for example, see "Baby Boomers Are Not Likely To Cause the Next Housing Crisis (Part 1)"). The somber picture promoted by demographer Arthur C. Nelson, scheduled to begin around 2020, features desperate Baby Boomers living in homes they can no longer maintain in areas of the country suddenly unattractive to the newest generations - primarily far flung suburbs full of over-sized McMansions. The resulting exodus in turn applies additional downward pricing pressure on the homes in the community motivating yet more aging residents to run while they are still able.

I use three recent articles with data points that appear to support my counterpoint and underlying case that boomers are making sound plans around their housing options, have a diverse set of interests, and maintain strong desires to stay connected to friends and family. Moreover, their financial decisions may shift the economic landscape, but they will not likely cause the next housing crisis.

House Rich, Cash Rich

On June 1st, 2014, Bloomberg published an article called "Cash Deals for Homes Reach Record With Boomers Retiring" that suggests at a minimum that doomsday for Baby Boomers and their former communities will not start on time.

The article suggests that rising home equity has enabled a substantial group of non-investors to pay cash for homes:

U.S. home-price gains have restored $3.8 trillion of value to owners since the beginning of the real estate recovery in 2012, according to Federal Reserve data…Combined U.S. home equity, the value of real estate unencumbered with mortgages, rose to a six-year high in the fourth quarter, according to the Fed…A record number of Americans are using that equity to pay cash for properties…In the first quarter, 29 percent of non-investment homebuyers used cash, the highest on record for the period, according to data compiled by Bloomberg…

The change in the make-up of cash buyers is relatively dramatic:

Lending for mortgages to purchase homes fell to $115 billion in the first quarter, the lowest in three years, according to the Mortgage Bankers Association. In the first three months of 2014, buyers plunked down $105.1 billion of their own money for properties, compared with $84.7 billion a year earlier, according to Bloomberg data. The share of purchases made by investors, who typically pay cash, dropped to the lowest first-quarter level since 2010…

The article suggests that the main drivers of the non-investment cash buying are Baby Boomers beginning retirement. Unfortunately, the article does not provide direct data on this point. Instead, it provides some compelling anecdotes. So, the conclusion that this cash buying is a boomer phenomenon is a kind of guilt by association: the kind of housing exchange that makes cash-buying possible makes the most sense for households without children who are making a definitive lifestyle change. These are households planning or entering retirement.

Another recent article, this time in the NY Times called, "Rethinking the Traditional Retirement Community," makes a similar point about rising equity enabling increased economic activity by Baby Boomers:

Like other home buyers, many older consumers postponed purchases during the financial crisis, said Steven Bomberger, president of Benchmark Builders in Wilmington, Del. But people over 55 have been among the first to return to the markets, said Mr. Bomberger, whose firm sold 42 age-restricted houses in 2013, up from 22 the year before. 'Seniors can move now because they have equity in their longtime homes, and they are ready to sell and get on with their lives,' Mr. Bomberger said.

Baby Boomers moving into age-restricted housing are maintaining old ties and staying active according to Del Webb, a unit of Pulte Homes (NYSE:PHM):

In recent years, Del Webb has built age-restricted projects near Chicago, Detroit, Cleveland and Boston. 'Our residents want to be close to their doctors and family members,' said Valerie Dolenga, a Del Webb spokeswoman 'About 50 percent continue to work at least part time.'

The market for age-restricted housing is small but growing rapidly:

In 2013, there were 21,000 starts of age-restricted homes, up from 13,000 in 2012, according to the National Association of Home Builders.

The article ends with a telling (and supportive) quote from one woman planning for her later years:

Odette Haight, 67, is still working part time as an office administrator, and she can run up stairs. But she opted for a master bedroom on the first floor when she decided to buy a home at the Village of Long Creek near Newark, Del. Her grandchildren can use a loft bedroom on the second floor. 'If I want to spend the rest of my life in the house, then I need to think ahead,' she said.

Optimistic Baby Boomers Looking Forward to the Future, Not Dreading It

The Bloomberg article quotes an interesting March, 2014 survey of 1000 adults aged 49 to 67 (margin of error of +/- 3.1%) by Better Homes and Garden Real Estate described in a press release titled, "Better Homes and Garden Real Estate Finds 70% of Boomers Expect the House They Retire In to Be Their Best." This kind of optimism is exactly what Nelson described as completely unrealistic. I find the results interesting in that they defy the notion that the move of Baby Boomers will trigger a housing crisis.

First of all, 43% of Baby Boomers surveyed plan to stay in their current homes. These numbers hardly suggest a mass exodus starting in the next decade. For the slim majority that do plan to move, 39% plan to move to a rural area, 27% to an age-restricted community, 26% to an "urban community." Seventy-two percent plan to stay in their current state of residence, again confirming the strong desire of Baby Boomers to maintain old connections. This diversity in plans mostly within the current state of residence suggests that the economic activity of Baby Boomers will get spread broadly across the country and not generally impoverish one region to the benefit of others as suggested in the Senior Sell-Off thesis.

Incredibly, almost 25% of all respondents indicated they plan to buy a second home. One could rightfully wonder whether the survey was somehow biased towards adults in higher income brackets, but the survey claims a +/- 3.1% margin of error.

Overall, I think the evidence continues to support skepticism toward the notion that Baby Boomers will trigger the next housing crisis by abandoning homes that no one wants to buy. The current economic activity and attitudes described above suggest otherwise. As always time will tell, but I am not worrying about it.

Be careful out there!

Disclosure: I am long PHM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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