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?