Boomers Retire and California is Bracing for The Shock
Older Californians are growing in number, at 13.6% of the state’s population in 2016. The number of Californians 65 years of age and older increased 3% from the prior year. Four-out-of-five Baby Boomers are homeowners today and will remain so in retirement, though most will sell and downsize, purchasing a replacement home of equal or lesser price. Nearly half are expected to relocate from the suburbs to more convenient city-living.
Among potential first-time buying families aged 25-34, approximately 46% own a home, down from 56% at the height of the Millennium Boom. While the population of 25-34 year-olds is growing around 1%-2% each year, expect their rate of homeownership to continue to slip through 2018 as they slowly muster savings for down payments.
Pair the mass relocation of the Baby Boomers with Generation Y’s entry into the housing market and watch home sales volume grow considerably in 2019-2021. This Great Confluence of retirees and Generation Y will create a fluid and stable housing market for California.
The two charts above track homeownership by age in the western census region and California’s population of citizens aged 65 and over, respectively. In combination, these two charts tell us about the future direction of real estate ownership and sales transactions among the rapidly growing population of California’s senior citizens.
At about the age of 65, most Californians stop working full time and begin capitalizing on the benefits of social security, Medicare and their years of saving. The decision to retire is often swiftly followed by a series of lifestyle changes as retirees take advantage of their newly-increased liberty and accumulated financial power.
One of the most significant changes is the sale of the retiree’s current home and the corresponding move to a new, more compact and centralized residence with a better year-round climate or in closer proximity to family. As California’s population continues to age, senior citizens will exert increasing influence over both the housing market and every other aspect of the California economy.
California citizens aged 65-75 are more likely to own property than any other age group, as displayed on the first of the above charts. The accumulated equity in their homes, combined with their savings from a lifetime’s employment allows them to exert a disproportionately strong influence upon the statewide housing market. When these citizens begin to change their spending and living habits in retirement, they create new opportunities for multiple listing service (MLS) brokers and agents who market single family residences (SFRs).
The number of people in California aged 65 and older is displayed on the second of the above charts. This rapidly growing segment of the population is traditionally made up of the retired and soon-to-be retired.
Over the past twenty years, retirees have exerted minimal influence in real estate transactions, as the age group of citizens over 65 was comparatively small. The generations born between 1915 and 1935 – during the Great Depression and World War II – did not have the numbers necessary to remold the housing market in their own image. That is about to change dramatically, as the above population chart demonstrates.
The massive Baby Boomer generation is defined by the U.S. Census Bureau as the generation born between 1946 and 1964. As they begin to retire en masse (a process which has already started) every aspect of the state’s economy will change. The Boomers, the largest age group behind Generation Y in California, have spent the last 30 years accumulating their wealth (primarily in the form of stock – not cash) and generally living in large, suburban SFRs.
Although the 2008 Great Recession wiped out some of their savings and put a few of these SFRs on the market (or in foreclosure) before their time, the majority of the Boomers are still on the brink of retirement. When they do retire, “dis-saving” will be a collective act. They will liquidate their stocks, sell their current homes and embark, unfettered, on the next stage of their lives.The impending wave of retirees has been briefly delayed by the 2008 recession. Many seniors held the majority of their wealth in the form of paper – stocks – and saw much of it erased overnight when the stock market crash turned their 401Ks into 101Ks.
However, Boomer retirements were merely postponed. Now that the stock market has largely rebounded and home prices have rising (however momentarily), retirees will soon regain their pre-recession confidence and perhaps some of their spending habits.
S&P 500: Stock Pricing Vs. Earnings
The shadow inventory of retiree homes for sale will thus manifest itself sooner rather than later. Those homes will be key factors in the elimination of the current rigor mortis in the housing industry. Retirees generally want to sell and relocate, and most will buy new SFRs; likely more than 70% will acquire a smaller (though not necessarily less expensive) residence than the one they have left.
History repeats itself for Boomer generation
The impending increase in suburban SFR home sales among senior citizens will keep housing prices in outlying bedroom communities depressed, limiting the gain Boomers take on a sale. This is a story of supply and demand economics that their generation knows all too well.
Due to their overwhelming numbers, the Boomers were educated in temporary grade school and high school buildings. They all hit the job market within too short of a time period and salaries dropped accordingly. When Reagan fired all the Federal Aviation Administration (FAA) tower traffic personnel, he was able to replace them with equally good and well-educated talent in just a few days.
The Boomers began renting apartments simultaneously in the early 1980s, driving up rents and leading to massive apartment overbuilding, which took more than a decade for the market to digest. A similar problem of SFR overbuilding erupted by the end of the 1980s for the same reasons, and was accompanied by a boom in housing prices ending with the 1990 recession.
CA Single- and Multi-Family Housing Starts
In the late 1990s the Boomers began to invest their accumulating wealth in the stock market, which generated a stock pricing bubble. The ensuing collapse of their financial empires wiped out much of this wealth.
Soon the Boomers will begin to sell off a considerable amount of the stock they still retain. Such asset reduction will continue for the next 15 years and kill any movement in the stock market. Current rises in stocks are the result of mere speculation due to historically low interest rates in relation to inflation. Billions of dollars in cash is currently waiting to be invested when the economy recovers.
Historical trends in Boomer conduct will also prove true now as retirees sell their current homes, looking to find replacement properties and live freer lives. The first Boomers to retire, those on the cusp of the population boom, have somewhat higher average earnings and savings than those who will follow. Consequently, the retirees of 2008-2017 will have the most money to spend, and will often have a second or third home to live in or sell.
Those retiring after 2018 will (generally) have somewhat less money, and thus less purchasing power upon their retirement. Those who retire later will also have a greater disadvantage due to the competition from other retirees in their generation. The homes they sell will fetch lower prices, the urban condos and retirement-community dwellings will be full before they arrive and prices will be rising.
The price reduction of large suburban SFRs caused by Boomer home sales will be further aggravated by a corresponding rise in the values of the more desirable replacement homes in near urban centers. While we cannot predict with certainty which properties will be involved or just where they will be, historical and current trends give us some hints.
Relocation: where will they go?
Homeowners in California do not tend to rent upon retirement, as shown by the first chart above. In fact, homeownership for those aged 75 and older remains 10% higher than for any age group under 50. Moreover, the percentage of citizens owning homes over the age of 75 grew even through the recession, and is currently near its highest level since 2002.
Homeownership is a well-entrenched habit among the Boomer generation; a fact not likely to change because of increased age. However, this does not mean retirees remain stationary.
Sooner or later they decide to move to a new location that has a better climate or is closer to other family members. With their collective savings and equity, most will have the resources to do so with ease.
Retirees have traditionally moved to smaller, more conveniently-located properties that are closer to urban centers. The U.S. Census Bureau reported in 2014 that approximately 12% of the population in California’s metropolitan areas is 65 or older.
To complicate Boomer relocation, the younger generation is better educated and more mobile, migrating with increasing frequency to the cities. Their parents are likely to follow. They will be attracted by the increased access to public transportation, the proximity to cultural and artistic institutions and (not least important) the closeness of their children and grandchildren.
As more senior citizens retire, interest in condos and other high-density residences that cater to the urban lifestyle will increase. Ownership of rental properties, which allow a more flexible and mobile lifestyle, is more cost-effective than ownership of SFRs and thus will most likely also see a bump.
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As retirees begin to relocate, opportunities will arise for real estate brokers and their agents to assist.
The most directly affected housing developments will be those that cater specifically to the needs of senior citizens. California law exempts seniors-only housing developments from ordinary restrictions on age discrimination. As the demand for senior housing increases, more developers and landlords will take advantage of this exemption. The range in pricing of high-density (high-rise) housing will also work to separate the more wealthy (retirees) from the less wealthy younger generation.
Expansion of existing SFRs to accommodate new relatives-as-tenants is another phenomenon that will increase. California legislation has paved the way in this area. In 2003, the legislature required cities to permit the construction of what are generally referred to as casitas or granny flats; attached, freestanding or over-the-garage apartments with no direct access to the main house.
The construction of such a flat transforms a SFR into a two-unit property within single-family zoning, a first step in California’s more efficient use of land. Casitas are sometimes used by homeowners to gain extra rental income, but they are most often used initially as a new residence for elderly relatives or in-laws. Increased living density will thus be the case not only for cities, but also for suburban areas, which will reap the benefits of a more close-knit and energy-efficient population (namely, a better fiber of social, civic and cultural life, and the development of restaurants, theaters, bars, entertainment and specialty shops).
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Retirees influence California real estate
The vast majority of retirees will continue to pursue some form of traditional ownership, as can be seen in the above chart of homeownership rates. As these retirees begin to relocate, opportunities will arise for real estate brokers and their agents to assist them in their transition. Farsighted hometown brokers will prepare for this migration now, offering relocation services to Boomers who move locally. The U.S. Census Bureau reports 50% of senior citizens who relocate choose to move to a new residence within the same community.
On the other hand, the impact of the geriatric shift on the sale of suburban homes in California may be ameliorated by emigration. Many retirees have historically chosen to leave California for states with a lower cost of living and a more relaxed, “retirement-friendly” reputation. Foremost among these retirement states are Florida, Texas and Arizona. Those with lower retirement pensions may relocate to Mexico.
Brokers can be of service to these sellers/homebuyers as well. They need to take the opportunity to suggest new residences in retirement-friendly communities where the broker has established contacts with cooperating brokers, and profit from fee splitting for referrals on these relocations.
first tuesday forecasts a solid return of buyers to the housing market by 2018, peaking between 2019 and 2021, as the next and larger generation (Generation Y) of homebuyers looks to purchase their first residence. This influx of new homebuyers coincides perfectly with the beginning of the retirement boom, which will release thousands of Boomer SFRs onto the market.
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It remains to be seen whether these old, poorly constructed suburban SFRs will be of interest to young homebuyers. Signs indicate that demand, among the young as well as the old, will be for commuter-friendly property closer to the high-skill jobs and urban center culture. It will be up to cities to provide zoning for a denser population, up to builders to create these urban high-rise residences, and the duty of brokers and agents to bring them to market.