March 9, 2008

The common perception among economists is that the current housing bubble will be a relatively short-term affair that should see a return to normal within the next few years.

But according to a study by two University of Southern California researchers, a bubble of even more monumental proportions lies just ahead. They call it the "generational housing bubble," and maintain that it will be fueled by the same Baby Boomers who have been bidding up prices since 1970 as they moved higher and higher on the housing ladder.

Now, though, the 78 million Boomers are about to enter the years when people tend to become sellers rather than buyers. And as a result, they expect "many more homes (will be) available for sale than there are buyers for them."

According to the researchers, the tilt toward age groups that are net sellers of housing is unprecedented. "The Baby Boom generation was born over a period of 18 years, and once its sell-off commences, it could dominate the housing market for up to two decades," they say. 

As the elderly become more numerous than the young, and as they shift into seller mode, the researchers postulate, the market shift could come quickly after 2010, causing housing prices to fall.

Even if housing prices remain flat, the researchers maintain, young households will likely slow their entry into homeownership, meaning sales should be slower than normal, and worsening the imbalance between sellers and buyers.

Only time will tell whether the alarming projections by Dowell Myers, a professor of urban planning and demography in USC's School of Policy, Planning and Development, and Sungho Ryu, a doctoral candidate at the school and an associate planner with the Southern California Association of Governments, will come to pass.

After all, not all seniors retire or sell their homes and move to smaller places. Many prefer to age in place and live out their lives in the houses where they've built a lifetime of memories. But eventually, as they die off, most of their homes will come on the market.

Myers' and Ryu's foreboding prophecies bring to mind a 1989 study by a pair of Harvard economists, who predicted a 47 percent decline in housing prices during the 1990s because Boomers would stop buying as they aged.

Housing-industry economists lambasted that forecast as pure poppycock, and it eventually blew up in smoke.

Indeed, one economist recently called their projection "one of the worst forecasts in the history of mankind."

But Myers and Ryu maintain that Gregory Mankiw, who eventually became chairman of President Bush's Council of Economic Advisers from 2003 to 2005, and David Weil, now working in the economics department at Brown University, were simply two decades ahead of their time.

Mankiw and Weil "may have miscalculated the timing of the decline, predicting its beginning 20 years or more prematurely," the new study says. "But the Baby Boomers will finally start retiring from the housing market."

In a paper that was published in the current edition of the Journal of the American Planning Association, Myers and Ryu say that folks who were born from 1946 through 1964 will continue to dominate the housing market, just as they have throughout their entire adult lives and just as they have like no generation before them.

Over the next two decades, though, the ratio of seniors to working adults will soar by 67 percent, they say.

The USC researchers don't expect the generational correction to begin until 2011 or so. That's just about the time the most pessimistic prognosticators suggest the American housing market will finally return to normal after spending five years or so on the rocks.

But it's also when the first wave of Boomers reaches age 65, the traditional dividing point between seniors and working adults. And once that tipping point is reached, Myers and Ryu say they will put more houses up for sale than the market will be able to absorb.

"After 2010, the leading edge of the Boomers will pass age 65 and growth among the elderly population will substantially exceed that of younger adults, an unprecedented social and economic development," they argue.
The researchers base much of their theory on the historic relationship between age and housing demand. Traditionally, homeownership rises with age and generally does not peak until after age 65.

Balanced buying and selling

For most of the American lifespan, the rates of buying and selling remain closely related, if only because those who sell one house typically buy another. Below age 50, buying is more common. But when people enter their late 50s and early 60s, as the leading age of Baby Boomers has now done, buying and selling are in balance.

When they reach their mid-60s, though, sellers start to outnumber buyers. And when they hit their 70s, sellers tend to dominate.

People continue to buy homes after that age. But once they hit that milestone, the number of sellers begins to exceed the number of buyers. Once they reach 75, they are three times as likely to be sellers than buyers. And at 80 and above, they are nine times more likely to be sellers.

Myers and Ryu project that the ratio of those 65 and over to people 25 to 64 will surge 30 percent in the decade between 2010 to 2020 and 29 percent more in the 2020s, altering the delicate balance between buyers to sellers for the foreseeable future. They say the supply of houses on the market will be dominated by the actions of aging homeowners "who have little ability to postpone" their need to sell and retire from the housing market. They also caution that Boomers facing financial, community and age-related issues "could flood the market with excess supply."

If values decline, as the researchers suspect they will, Boomers who remain owners will themselves suffer because their equity will fall, shrinking what for many is their retirement savings.

A possible upside

If there is a positive aspect to Myers and Ryu's dire predictions, it's that the coming generational bubble will be a rolling one that won't impact all housing markets at the same time. In some states, the sell-off will come later rather than sooner. Indeed, if the growing number of seniors behave as those who have gone before them, regional differences will be sharp.

Historically, seniors don't become net sellers in Arizona, Florida and Nevada until they reach 75. In 12 other states - Arkansas, Colorado, Delaware, Georgia, Hawaii, Idaho, New Mexico, North Carolina, Oregon, South Carolina, Tennessee and Utah - they become net sellers when they hit 70.
But the opposite is true in 13 other states - Alaska, California, Connecticut, Illinois, Indiana, New Jersey, New York, Maryland, Massachusetts, Michigan, Minnesota, Ohio and Rhode Island. In those states, the crossover point starts at age 55.

Senior sellers outnumber senior buyers in the remaining 22 states when they turn 65.