Economists are scratching their heads over an apparently unprecedented situation in the housing market: a serious decline in the absence of other alarming recessionary characteristics in the broader economy. While home prices drop and inventories climb, the national economy continues to perk along – more slowly, perhaps, but without grave disruption. This is not the S&L boondoggle and it is not the 1989 collapse. But what is it?
I’m not an economist and I haven’t collected any statistically sound data, but I can tell you what is going on in what demographic analysts like to call my “cohort”*. Here’s a common sense analysis. Do with it as you will.
The Baby Boomers are retrenching.
Baby Boomers – born to the Greatest Generation between 1946 and 1964 – number about 78 million and are now between 42 and 60 years of age. According to the results of a survey of Baby Boomers conducted for the NAR and published last October, “[m]ost…were unsure of their financial future, with three-quarters saying they are not financially prepared for retirement and many expressing anxiety about their ability to retire.” The AARP also reports that Boomers’ confidence in their retirement future is declining.
They got that right.
The NAR study echoed other analyses that conclude that the Boomers will continue to work well beyond the earlier generation’s retirement age of 60-65. True enough. However, then-NAR economist David Lereah also concluded that Boomers who “are more likely to stay in the workforce longer … will be less likely to downsize than previous generations”. And there’s the rub – a dangerous fallacy supporting an unrealistic view of market demand.
Let’s review the Boomers’ situation.
According to the FDIC, among others, we haven’t saved enough for retirement even if we figure in Social Security. And in case any analysts care, many to most of us don’t figure it into our retirement budgets. We have absolutely no faith that our politicians have the courage to fix the Social Security system and we therefore cannot rely upon those benefits in planning our future. Uncertainty.
We don’t know how long we’re going to live. We do have faith that medical science will continue to increase our life expectancies and we don’t know how much. Indeed, we have lived through so many quantum leaps in that field that we know that neither we nor the actuaries can accurately predict the impact on our lives of medical miracles to come. Therefore, planning a savings account adequate to support us by drawing upon it for living expenses is out of the question. More uncertainty.
We do not have the same sentimental attachment to our homes that our parents had. Wives and moms have been working outside the home. We have not held the same jobs throughout our working lives and we have not held them in or near our home towns. We have moved several times (once every seven years is the current average). We view our homes more as investments than as Little Houses on the Prairie.
Our homes have gotten much larger, increasing from about 1,170 square feet on the average in 1955 to an estimated 2,500 today. At the same time our families have gotten smaller, and now occupancy rates for those homes have declined from 2.9 people in 1975 to about 2.1 today. When our parents stayed in their homes on retirement, they retired to much cozier abodes.
Like our parents, we have wanted the best for our children. So we bought homes and traded up until we located our flock in the nicest housing we could provide in the towns and suburbs with the best schools. We have driven the real estate market accordingly: up, up, up.
And now fifty percent or more of our family net worth is the equity in houses larger than we will need.
So here we are: trying to figure out how to plan sustainable lifestyles. We will continue to work beyond Retirement Age because we are active and also because we cannot afford to retire. But we will not necessarily work at the same jobs that have supported the big houses in the suburbs and we definitely will not be working so that we can keep those houses and heat and cool them. We need to create accounts that will earn income for us over an indefinite period of time and the source for such accounts is in the equity in our homes.
So what is happening to the housing market? June Fletcher, in a June 19, 2006 article in The Wall Street Journal Online, anecdotally noted that in diverse markets across the country, sales of large homes had declined drastically or stagnated while sales of smaller homes were actually up. I strongly suspect that this is a national pattern that is hidden by “overall” home sales statistics. The Boomers are starting to cash in and cozy up.
Yes, Mr. Lereah, the Boomers are downsizing and this trend is just beginning.
* I decline to be precise about my age, but it is 50-something.