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Wednesday, August 24, 2016

Demographic HomeMageddon Underway...Will Last Until at Least 2035

91% of all US home buying is done by those aged 20-69yrs/old, according to NAR data.  In 2015, Millennials (20-35yrs/old) made up 35% of home purchases, Gen X (36-50yr/olds) bought 26%, Boomers (51-70yr/olds) 31%, and the Silent Generation (70+yrs/old) 9%.  I'm no great fan of the NAR, but this makes basic sense as most homebuyers need an income to be homebuyers and most 70+yr/olds are retired and have the lowest average incomes of all the above groups.

Here's the very big problem for residential real estate...the chart below shows that over 70% of all the population growth among potential home buyers (20+yrs/old) from 2017-->2030 will be among the 70+yr/olds (chart shows average annual growth for the two groups from 2000-->2016 (left) and 2017-->2030 (right)).  This is simply unprecedented in US history.
To put it in a broader context, the chart below shows annual growth in the 20-69yr/old population (red line) vs. annual growth in the 70+yr/old population (blue line) since 1980.  That unprecedented, impending crossover in the lines means everything for real estate and the economy in general.

The impending nosedive in the growth of potential buyers vs. surge in elderly (those more likely to downsize or out-right sell than buy) should be quite disconcerting considering:
  • Home prices are at or near '07/'08 bubble peaks meaning any new investments require far more cash down to achieve a positive cash flow
  • Mortgage rates can effectively go no lower and a marginal increase is probable (unless the Fed reinitiates QE and implements NIRP)
  • Present lending standards are far more stringent than during the '07/'08 fog-a-mirror NINJA free for all
  • The dollar is likely to continue appreciating making foreign buying continually more expensive...and less likely (unless the Fed reinitiates QE and implements NIRP)
  • Rents and rent to income ratios are off the charts to new records well above '08...maintaining the pace of rent appreciation is highly unlikely and rent declines may be the more probable course.
Plus, add in the pace of new housing creation continues ramping up (still only half way to '08 levels but still far more than can ultimately be absorbed with the changing dynamics).  With so few new buyers, a growing quantity of new homes, and so many likely sellers...a very simple question must be asked, who will buy all those houses and at what price?

22 comments:

  1. "who will buy all those houses and at what price?" EXACTLY.

    While Brooklyn and Hoboken housing inventory is limited, consider all the homes of Long Island and the baby boomers approaching retirement that will want to leave to escape the high property (school) taxes. There will be an abundance of inventory without the demand as millennials (1) earn less (2) may never get married (3) probably aren't making babies (4) prefer shorter commutes and walkable neighborhoods (Queens, Brooklyn, Hoboken). Without the demand for more bedrooms...I'm very anxious about what happens to the NYC suburban housing market beyond 2018. Your graphs bring to life the point of view I've developed. Thank you.

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    1. I live in the suburban NYC market, and it seems to me that with my very large lot, un-diverse neighborhood (despite Obama's best efforts) and convenient access to commuter trains to NYC, my neighborhood is dirt cheap compared to other suburban neighborhoods. Look at prices in Vancouver BC and Silicon Valley. Those are good areas but the nearby cities are not in the league of NYC.

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  2. People who own McMansions in gated suburban communities will be especially hard-hit. Golf course communities also will find themselves without enough living members to keep up their properties. Migration patterns will help those in the South and West perhaps. However, those moving into the South and West will tend to be less affluent and unable to buy suburban luxury real estate. They will be looking closer to where their jobs are located and for smaller dwellings.

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  3. Housing will be one of the last tangible assets to own when the paper/electronic money starts to evaporate. Where will you put your cash- Treasuries at 1.5%? Junk Bonds with very high risk? HY or GIC? A money market with NIRP? It's like trying to find the least dirty place in a filthy pig-pen. While housing market may cool off, as long as there is $180 billion a month in global QE, there will be a floor in pricing. Limited supply continues to a factor in many regional markets as well.

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    1. Gold, Silver, food, guns, ammo, liquor.

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    2. And you're going to keep that all where exactly?

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    3. @ Anon - Believe it or not, I'm actually over-weighted by asset class in RE. You make sense and owning a house you can afford with low or no leverage is the best case for many. I'd say the same for affordable rental real estate owned with low or no leverage. In either case, the valuation of the property is secondary to it's utility and in the case of the rental, it's cash flow.

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    4. Chris, don't get me wrong, I'm not at all happy to be overexposed to RE. But what else can I do? I fear the day when my "asset" aka home value/equity drops 20-30-40%. If I sell, I have cash, but do I trust a bank to keep it with NIRP- no? Put under mattress- no? Pay exorbitant rental costs- no? Buy other properties at the peak- no? Whichever way I analyze the possibilities, I'm not liking the outcome. I'm now sitting on a HELOC (zero balance) at least trying to position myself to draw cash out once the RE market bubble burst. But even so, I'll still end up loosing.
      If I could, I would be buying RE that has some utility value- land, orchard, water, but I'm in San Francisco/Nor Cal area and those type properties are far beyond commute range. You also get tied up with all the other "stuff" in life as well...kids in school..kids in sports..demanding job..trying to survive the daily grind. Good luck to us all.....

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  4. What is the source for population growth estimates?

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    1. Data is from US Census but I pull it from OECD.stat

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  5. Please educate me if I'm wrong, but isn't this a good thing for millennials looking to buy once we hit 2020ish when the mass retirements and sell offs really start to kick in? Over supply should lead to lower prices. Which, at least will be good for those of us with a decent income and good credit.

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    1. You are correct. But the 1% of the population that owns most if not all the houses but also the money and the stocks and the financial assets are baby boomers, not millenials, and it's bad for them.

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    2. In theory, you are correct. The problem is what should happen in a "free market" and what will happen in the present centrally directed market can and will continue to diverge until the ultimate snapback to fundamentals. Mortgage debt is the largest portion of banks assets...and central banks will continue to throw gasoline on the fire to delay the inevitable. This means I fully expect more Federal Reserve QE, implementation of NIRP in the US, maybe even federally issued 30yr mortgages at 2% or 1%? I think it's likely the largest among us (Blackrock, GS, etc.) will be paid with negative interest rate loans with which to buy up swaths of houses. Just expect the fed's and Federal Reserve to retard a free market setting of prices as long as they remain in control.

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    3. So if I read correctly just as long as there is another sucker to buy at inflated prices all is well. I still contend that either those in charge are either really stupid or this is all by design.

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  6. Does this take into accpount immigration? I've read we'll hit 400M by 2050 i.e. we're planning to add the equivalent of Germany's population to the US in the next 38 years.

    All those Indians and Asians will want to sleep somewhere witha roof.

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    1. Hey Gifford - yup, inclusive of anticipated immigration. Recent article on this topic below...
      http://econimica.blogspot.com/2016/08/illegal-immigrant-outflows-what.html

      US population will continue to grow primarily due to old living far longer than their predecessors...very little of the growth from having more net children. Simply put, the population of 65+yr/olds will grow by 40+ million from '15-->'50...the population of 0-24yr/olds will grow by a little less than 8m over the same time span. US population growth is coming due to longevity, not higher fertility. The economic impacts from these different sources of "growth" are really significant.

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  7. They will keep letting in more and more from India, who don't make trouble. Where I work almost all the MDs are Indian, and fairly newly arrived.

    Indians are almost ideal immigrants if you want housing prices to stay high/go up. they don't make trouble, super low crime rate, they are really religious in the sense of bothering people, and saving money getting married and having kids is their primary goal in life.

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    1. That's because you're getting upper-class upper-caste Indians. India has a large number of people with an IQ about 90, but you never see them with the student visas.

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  8. NOT really religious

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  9. Not funny, but I thought to myself while reading the 9/3 reply above how it seems there is a steadily increasing number of US citizens with IQs of about 90...and many of them with college degrees...living in their parents' basements, un or under employed. Quite a perplexing near-term future we face.

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  10. We (involved citizens) have been lazy and uninvolved for a long time now....that fact has allowed the "Clinton" types to degrade our country, it's finances and truly, it's economy. Now we will pay the price. Monetary and credit crisis's will be the catalyst for the huge hurt coming our way. It's simple, it's arithmetic stupid, the math doesn't lie.

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