By John Grace
Everyone knows that interest rates, location and inventory drive the conventional wisdom on the housing market. Let’s begin by challenging what we think we know, beginning with George Patton’s sage observation, “If everybody is thinking alike, then somebody isn’t thinking.”
If interest rates were a primary driver, you can recall that in the 1980s, first-time home buyers wouldn’t have closed escrow in abandon. Baby Boomers were delighted to move in with their new 30-year fixed loan at 16%.
Those nosebleed interest rates were no hurdle at all. Instead of getting lost in conventional wisdom, we would be wiser to study consumers’ buying and selling behavior based on age.
We can track down precisely the ages that Americans, on average, buy and sell homes, thanks to Dent Research and the U.S. Census Bureau.
• Age 31: First home purchase.
• Age 41: Largest home in life.
• Age 78: Home sold.
While some Americans blame the Baby Boomers for current crazy home prices, it’s not their fault. Thanks to the pent-up demand of enlisted members returning home from war, there were 76 million Americans born between 1946 and 1964. That makes for 24% of the U.S. population.
There was unprecedented demand for everything available for sale, from diapers, Schwinn bicycles, lots of board games like Monopoly, Mustang cars and homes. That’s water under the bridge.
Just as the high double-digit 1980s mortgage interest rates were no obstacle to home ownership, the lack of inventory cry fails to tell the whole story. Indeed, the developing drama behind the headlines reveals an entirely different narrative.
My job is to help you see both sides of the equation. Everybody must get off the merry-go-round when the music stops on the carousel. Let’s see how you can leave with the brass ring.
According to the Centers for Disease Control and Prevention the average U.S. life expectancy has declined again to 76.4 years, the shortest in nearly two decades. Boomers begin turning 77 this year. Look at the average life expectancy before you look at your family’s experiences, who may have more resources and better health care than the majority.
The average age Americans sell their home is 78, according to the U.S. Census Bureau. About 24% of the population will begin reaching 78 in less than three months. Since 2019, there have been more people over 65 than under 5 in the world, per the World Economic Forum.
The Japanese story may forecast our future. Japan’s real estate bubble burst by 70% in 1990 but hasn’t bounced back after 33 years. Today, there are 11 million vacant homes or 18% of the 63 million residences in Japan. The Nomura Research Institute predicts vacancies “could exceed 30% of all houses in Japan by 2033.”
Japan is not alone. California, the most populous state in the nation, has about 1.2 million empty apartment units and single-family homes, according to the California Association of Realtors. More than 16 million homes are sitting vacant across the U.S., according to LendingTree.
As China goes, so does the world. We led the world with the Great Depression; now it’s no surprise that China’s exports went negative in May 2023; it is the world’s second-largest economy’s turn to conduct the world’s downturn. Even China’s 1.4 billion population can only fill some of its vacant properties, where Fortune contends the number of empty homes and apartments ranges between 65 million to 80 million units.
Let me encourage you to avoid “recency bias,” which is the tendency to place too much emphasis on experiences that are freshest in your memory — even if they are not the most relevant or reliable. Let go of what happened in your lifetime or your parents’ lifetime. Instead of looking at history in the small rear-view mirror, please turn on your GPS and look out over the large windshield in front of you to better prepare for what may be the crash of your lifetime.
The world has only seen the Baby Boom generation happen once in history and only once in one country. How will real estate prices and rents play when 76 million people disappear for the first time?
The developing home vacancy story I see happening right before your eyes suggests that when 24% of the population goes to heaven and the residential inventory remains the same, prices and rents will go down to a very hot place. To see where home prices are headed, Dent Research postulates that visit Zillow with any address you like to see where the price was in 2012. That price may well be in your future.
While homeowners cheer that average prices have tripled or quadrupled over the past 20 years, the bad news is that the average American household income has increased only 1.6 times, per Dent Research. Clearly, the separation between income and home value is not sustainable.
Rather than starter home buyers becoming anxious and compulsive over the fear of missing out, let me suggest you stay serene with keeping your purchasing powder dry. As America goes from lack of housing inventory to surplus, it will soon be that the giant home price elephant kneels for beginner buyers to get on and enjoy the ride of the next wave of appreciation.
John Grace is a registered representative with LPL Financial. His On the Money column runs monthly in The Wave. The opinions expressed here for general information only and are not intended to provide specific advice or recommendations for any individual.
California … has about 1.2 million empty apartment units and single-family homes, according to the California Association of Realtors.