Posted by Tim Stobbs on March 8, 2010
The majority of reader’s questions I get tend to be situational like: can I retire, do we have enough for me to stay home from work? So it was a bit of surprise to get a question that was looking purely for my speculation on a topic:
I would love to read an article about your opinion of a future “generational housing bubble” regarding our aging baby boomers and our current population growth not turning over enough people to replace them. What happens to house prices when baby boomers start selling their homes and moving into senior friendly housing?
The past 30-40 years of baby boomer house buying has fueled demand and driven up house prices creating an affordability barrier for the next generation, which in turn caused the lax mortgage rules. They made mortgages cheaper instead of homes, and that only gave prices nowhere to go but up. Now a 3 bedroom home is just barely affordable for the average income family. If the gov’t is going to deflate this bubble instead of waiting for it to burst then they will have to tightly reign in the growth in house prices that people have come to expect.
Well this question came in right after my post on the new measures to deflate the housing bubble. So obviously the government has tried to take a bit out of this housing bubble, but not too much. Why? I’m strongly speculating here it has to do with not pissing off the baby boomers by causing their housing values to crash right after the 2008 stock market correction. After all the majority of them do vote (compared to other age categories) so the new rules I suspect are walking a fine line of doing something to cool housing, but not too much. The decision was more of a political one than a practical one.
So what will happen to the housing market in the long run? I still think we are doomed to a large house value correction on average (how it plays out in regional markets is impossible for me to guess at). Why? It’s the basic balance of supply and demand. There are too many boomers with non-starter houses and second houses (cabin or investment property) and too few buyers that can afford to pay what they want for those properties. As they age and want to get rid of those homes (or more likely need to get rid of since they don’t typically have enough saved for retirement) it will put too many houses on the market all at once. For a while the boomers might try to stick to their guns and ignore the reality but in the end some might start getting a bit desperate to sell and that would trigger a spiral down in prices.
Yet there is a large hole in my speculation. It assumes that the majority of boomers just stop working, since there has been a lot of talk about doing some work in retirement you may end up with a more balanced exit of the boomers from the market. In this case it might avoid a crash in housing prices and we might just end up with a more gentle correction that goes slightly down followed by a leveling off in prices as incomes need to rise up to a more equal footing to house prices.
So that’s my speculation on the market. Right now I would guess at about 50-50 odds for either case occurring. The boomers are not typical in a lot of ways so trying to predict their overall movement in a market is gamble at best. What’s your thoughts on this generational bubble? Will it correct or not?