Columnists John Grace Opinion

ON THE MONEY: The fate of real estate; a silver tsunami

No one can see the future, but when it comes to residential real estate we can put a floodlight on the road ahead by studying the buying and selling behavior of American consumers based on age. It is important to look at both sides of the equation.

Buyers have been led down the path of focusing on location, interest rates and inventory. The most important factor to take into consideration, however, is buying behavior based on age.

Thanks to the U.S. Census Bureau and Dent Research, we can see that Americans tend to buy their first house at 31, their largest home around 41 and on average sell those same homes at 79. Born 1946-1964, boomers are 55-73 this year. 

From 1980 to 2000, 40% of all homes purchased in the U.S. were on lot sizes of half an acre to 10 acres, according to Dent Research. That is a 20-year period, where individual thinking boomers were doing the same thing at the same time of the same age group that couldn’t live without their magnificent McMansions.

Thanks to Dent Research, members and students have learned that demographic trends are invaluable with providing investors and their financial advisers the tools to better forecast what might lie on the road ahead. 

As Harry Dent said at his Irrational Exuberance Summit in Washington, D.C., that I attended in mid-October, Australia, New Zealand and the U.K. all have big real estate bubbles. While healthy real estate prices are a good thing, indicative that the area is “an attractive city or country to live in with a good standard of living, good schools and low crime.

But nosebleed levels like 8 to 10 and even 20 times everyday incomes to buy an everyday house is ridiculous. In fact, wages paid to employees become higher to compensate for that higher standard of living, along with more expensive office, store, plant and warehouse costs.

Dent asks: “Isn’t that one of the reasons we are losing key industries to lower cost countries?”

He made it abundantly clear, “High real estate prices past a normal level of 3-4 times income in good cities only benefits the older people who already own real estate and who are going to work, but they produce less, and then die. It kills the standard of living for the new up-and-coming generation.

“It only encourages more focus on fixing up and flipping homes, instead of investing in productive capacity to produce real goods and services and for export and global competitiveness.”

Here’s how the Wall Street Journal sees the current U.S. residential real estate situation as of Nov. 23. “The U.S. is at the beginning of a tidal wave of homes hitting the market on the scale of the housing bubble in the mid-2000s. This time it won’t be driven by overbuilding, easy credit or irrational exuberance, but by an inevitable fact of life: the passing of the baby boomer generation. Seniors are expected to vacate roughly 21 million homes over the next two decades.  That’s more than the amount of new properties sold during a previous two-decade period that ended with a housing boom.” 

This is unprecedented. “One in eight owner-occupied homes in the U.S., or roughly nine million residences, are set to hit the market from 2017 through 2027 as the baby boomers start to die in larger numbers, according to an analysis by Issi Romem conducted while he was a senior director of housing and urban economics at Zillow. That is up from roughly 7 million homes in the prior decade. 

By 2037, one quarter of the U.S. for-sale housing stock or roughly 21 million homes will be vacated by seniors,”

It stands to reason for this observer that current prices are a direct result of 76 million Americans coming into the equation. It didn’t matter whether the population was legal or illegal, legitimate or illegitimate.

With all of that demand for housing coming out of the woodwork home prices must go up. On the other side of the equation, it becomes reasonable that when boomers who constitute 24% of the U.S. population go to heaven, the supply and demand principles come back into play. When 130 years of residential real estate remains on this earth after 76 million people go to heaven without their cherished McMansions, you tell me where you think prices are headed.

Let me be clear. When 76 million people go north to heaven it would not be out of the question for residential real estate prices, along with rents, to go south straight to hell.

John L. Grace is president of Investor’s Advantage Corp, a Los Angeles-area financial planning firm that has been helping investors manage wealth and prepare for a more prosperous future since 1979. His On the Money column runs monthly in The Wave.