Should you prepare for a housing market crash as Baby Boomers age, potentially flooding it with a quarter of currently owner-occupied homes over the next two decades? How will the silver tsunami affect house prices over the next decade? Should you buy now or wait? In this video we discuss housing and demographics and how that will shift the housing market as we help you become The Educated HomeBuyer
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Connect with me 👇 Jeb Smith (huntington beach Realtor/orange county real estate) DRE 01407449 Coldwell Banker Realty ➡I N S T A G R A M ➳ https://www.instagram.com/jebsmith ➡Y O U T U B E ➳https://www.youtube.com/c/JebSmith
Connect with me 👇 Josh Lewis (Huntington Beach Certified Mortgage Expert) DRE 01209148 Buywise Mortgage M:714-916-5727 E: firstname.lastname@example.org ➡I N S T A G R A M ➳ https://www.instagram.com/joshlewiscmc ➡Y O U T U B E ➳https://www.youtube.com/c/buywiseborrowsmart
For Show Notes, See Below 👇
[00:00:00] Jeb Smith, Huntington Beach Realtor: What impact will boomers have on the housing market in today’s episode, we’re going to be talking about housing and demographics and essentially it being the next big shift when it comes to housing affordability. So Josh, you and I have talked about this in detail off the podcast but I thought it would be helpful to come here and shed some light on it.
There’s a big conversation happening out there at the moment that the silver tsunami, all of these boomers aging, dying, selling their homes is essentially going to create this massive supply coming to the housing market, which essentially is going to bring housing prices down.
Instead of addressing that, let’s talk about first the four or five things that’s going to cause the housing crisis, crash over the last 10 years. And then we can talk about this in a little bit more detail.
[00:00:59] Josh Lewis, Certified Mortgage Consultant: The first one that was always, and still to this day, is my favorite Jeb, cause it won’t die. It’s like, Dracula. You cannot kill it.
[00:01:06] Jeb Smith, Huntington Beach Realtor: Cannot stab it in the heart.
[00:01:07] Josh Lewis, Certified Mortgage Consultant: This idea of shadow inventory, so for those of you that listened for a while, from 2008 to about 2012, primarily made my living flipping houses. So we started buying in late 2008 and by about 2010, I would scream from the mountaintops, if you don’t own a home and you have a job and want to be in a location for an extended period of time, please buy a home.
For us in Southern California, nice inland areas like Anaheim, first time buyer homes. You could own that home with an FHA loan for less than it costs to rent. And one of the arguments that many people, “Oh there’s, there’s a bunch of shadow inventory. The banks are sitting on millions of homes and as soon as home prices go up a little more, they’re going to flood the market with those and they’re going to go down.”
We’ve seen a big resurgence here just over the last year. You have people who love to make Tik Toks and Instagrams and YouTube’s that a housing market crash is coming. And what they do is they drive around on the weekends and they say, “see, this builder says there’s only one home available, but you can see there’s 12. They’re just holding them back to try to artificially keep their prices up.”
Again, without going down the rabbit hole of how absurd that is, builders are not in the business of holding homes on their books. Banks are not in the business of holding homes on their books. That one was silly.
But what are some of the other ones that we’ve seen, Jeb?
[00:02:23] Jeb Smith, Huntington Beach Realtor: We’ve had rising interest rates are going to cause the crash. Recently, we’ve had the whole student loan repayment is going to cause the crash, which again, some of these things haven’t played out yet.
We’ve had what we said, rising rates. We’ve said student loans. We had what? Airbnb’s coming to the market are going to cause the crash. It’s always something. It’s always the idea that the next big thing is going to cause the crash.
But what I will say is when we start talking about boomers and we start talking about the potential impact on the housing market. This one has the biggest potential to have an impact on the market. Just because the sheer number of [00:03:00] boomers that have owned homes and the percentage of the population that they make up. And they’re aging, right? And so I think that’s the conversation we want to have. Whether or not it creates more supply. That’s what we’re going to talk about.
It’s definitely going to create supply. I guess the better statement was whether or not it creates the crash. And that’s essentially what we’re addressing here is this shift in demographics is going to happen. Now how that shift plays out is to be determined.
But what we’re going to talk about is going to give you some numbers, some stats on different generations, and then we’re going to be talking about kind of life experiences to some extent. I deal with a lot of boomers in selling properties and what I’ve come across personally to give you an idea of the mindset because that is part of it.
Some of these will come to the market. Some of them won’t, how many will is to be determined. But I think maybe talking about population distribution to start giving people an idea of what kind of numbers are we actually talking about here.
[00:03:57] Josh Lewis, Certified Mortgage Consultant: And why do these numbers matter? Let’s look at all of those phantom reasons why the housing market was going to crash. They were either issues that were going to cause an increase in supply or a decrease in demand, either able or willing demand there for either reason.
And what we’re talking about here, the silver tsunami is undeniable. There’s a saying in economics that demographics is destiny. We can look and we know what’s going to happen over the next 20 years with the baby boom generation. Father time is undefeated. We usually talk about that when your sports heroes are retiring, but unfortunately for all of us, we’re going to get to end of life.
Last week, my mom took me to see the Eagles in Indianapolis and Steve Miller Band filled in for Donald Fagan and Steely Dan because Donald Fagan was sick and in the hospital. Steve Miller is 80 years old and I was shocked to find that the Eagles are all in their late 70s.
[00:04:47] Jeb Smith, Huntington Beach Realtor: Josh, our listeners aren’t resonating with this. They are primarily millennials. That have no idea Fagen is. Who Steve Miller is. So you’re just talking nonsense at the moment,
[00:05:00] Josh Lewis, Certified Mortgage Consultant: Old people that your parents enjoyed are moving on and getting closer to death. And those people are the folks that we’re talking about. Boomers that have assets. That owned homes.
And the first talk really that I had ever heard of this silver tsunami was in the early two thousands before the great recession. And the thought was boomers were going to start hitting retirement age. And it wasn’t in relation to housing. It was, Hey, they’ve accumulated all this money in 401ks now money has to come out.
So where we had net inflows into the stock market all through the nineties, as boomers were in their prime earning years, it was going to come out. It didn’t play out that way. So in addition to going through the numbers of just how the population through the generations are distributed, we need to realize that everyone has had projections of how boomers are going to behave in retirement.
And it has really never played out. They’ve never behaved the way economists expected them to. But in looking at that, how do the four primary generations of adult age in the US work. I mean, The Silent Generation is almost [00:06:00] gone. There are a few still around and with us.
But boomers make up 21.16 percent of the population. Gen X, my generation, we think Jeb is like a baby Gen X or an ancient millennial, one of the two. But Gen X is 19.83% of the population, so 2% smaller. So even though the leading edge of boomers have started dying out, they still make up 2% more of the population than Gen X.
So Gen X was a little bit of a baby bust. Not huge, but a little bit. And that’s important, Jeb ’cause when we look back to 2008, we’re gonna go through some numbers that builders had heavily built through 2000 to 2008 as the generation that was coming of prime home buying age was much smaller than the prior generation.
So in addition to all of those other issues we had for a period overbuilt relative to the people who were coming of prime home buying age. Now our audience and the people we’re talking to today, Millennials make up 21.75 percent of the population. More than boomers. And then Gen Z behind them, just about the same 20.67%.
So someone could easily look at that and go, well, what’s the big deal? It’s pretty much evenly distributed. We got 20/20/20/20 percent., So that’s it’s all fine there. No problem. As boomers die out, they get replaced by another similar sized generation behind them.
[00:07:13] Jeb Smith, Huntington Beach Realtor: You made me think of something when you said that I’m either a really young Gen X or really ancient millennial. I just carried my kids to college campus where I went to school at East Carolina University about two weeks ago. And we were walking across campus and I looked at my wife and I go, is it weird that when I see these kids like walking by me, that I don’t really feel like, they’re that much younger than me.
They’re half my age, Josh. And I’m like, I don’t feel old. I do feel old sometimes. But that’s where I feel like the young gen XR. And then she says, No, they’re looking at you like you’re basically ancient and that’s where the ancient part of the whole millennial process plays in. But nevertheless so let’s talk about you were getting into homeownership rates.
So boomers, they owned a lot of homes. So what have we said? Typically, what is it around 64, 65 percent of Americans choose to be homeowners at some point in their life? The boomer generation was on the higher end of that. In fact what the 70, almost 78 percent of boomers own real estate, which is why we’re having this conversation.
[00:08:15] Josh Lewis, Certified Mortgage Consultant: Well, currently own real estate. So they are currently homeowners. So not only is this close to, if not the biggest cohort, it is the generation that is getting closest to leaving this earth and they have the highest rate of homeownership. So this will obviously increase supply in one way or another. So we’re going to go through the numbers and put some context to that.
Gen X is not far behind them. Right about 70%. Millennials at 51% and Gen Z at about 30%. Jeb, I saw an article this last week that blew my mind and it should stop amazing me how dumb the media is because for the most part there’s not money in being a journalist so it’s young kids fresh out of journalism school and they read a study, they read an article and they try and [00:09:00] put it into context and they just say silly things.
This one said we have wealth inequality that boomers have 400-500 percent more home equity wealth than millennials and we have to fix that. I said, do you not understand the mechanics of how that happened? It wasn’t that boomers are magical or that they were gifted something. It’s that they’re older.
So when you own a home, if you don’t do cash out refinances and you pay the loan down over time, and inflation takes its impact and the value goes up, in 10 years you end up with a nice chunk of equity. In 20 years, you end up with a really nice chunk of equity. And in 30 years, you may even have the house paid off and be sitting on pure equity.
So someday millennials will be the boomers and they will have that wealth. We’ve seen the generations buy later, but we also have not really seen the overall homeownership rate go down. So really in the context of this, I think this is actually a good thing and a hopeful conversation for millennials and Gen Z coming behind them.
Who last week, our topic was, “Hey, are you ever going to be able to buy a home?” And we talk about different things happen through the years and you can’t look at today and go today looks hopeless. This is how it’s going to be. Because it’s been that way for three, four different cycles over the last 20, 30 years where people say homeownership has just passed people by.
We had that in 2008, 2009, 2010, when we said millennials will never own, they’re going to live in their parents basement, pay on their student loans and never own a home. And yet here they are up at a 51.5 percent homeownership rate and increasing by the year.
That is our largest group of homebuyers. So really just putting into context, the generations are all roughly the same size. The older generations own at higher rates. So they are going to be getting to the age where they either downsize, go into retirement living homes or pass this earth and leave that home and something has to happen with that.
So that is going to lead to an increased supply. At that point, Jeb, we have to put that into context. What does that mean? Is that a terrible thing? Does that mean more supply is going to lead to a housing crash?
[00:11:07] Jeb Smith, Huntington Beach Realtor: Well, no. We often talk about supply and demand being the predictor of housing trends. What’s going to happen in the housing market? Look at supply. Look at where demand is. Those two are going to give you an idea of where prices are headed. And on top of that, demographics are one of the leading indicator in housing trends as well. We go back to 2007, 2008, the crash.
One of the things that is often overlooked in that crash, we talk and even we don’t talk about it very much. We talk more about the risky loans, all of the craziness out there, a hundred percent financing, no income, no asset, just complete liar loans. But also a key component of that was demographics, right?
There was overbuilding, over supply of homes at that time. And you are reaching a time when there were less homebuyers turning prime buying age. So there were less buyers in theory, hitting the market around that period of time, which allowed [00:12:00] supply to build even further and, created additional turmoil in the market or allowed the turmoil to go further than it probably would have otherwise.
So let’s talk about, we can talk about completions, we can talk about the number of transactions back then. Compare it to now to give you an idea of, again, supply because supply is really important to predicting what’s going to happen.
[00:12:21] Josh Lewis, Certified Mortgage Consultant: Yeah. So just to give us some context in 2005, there were 1.28, almost 1.3 million new home sales. So that was the absolute peak. In 2006, there were 1.911 million completions. So builders completed that many homes. The prior year they had sold 1.3 million. We all know what happened in 2007, 2008. So we hit a cycle low in 2011, only 310,000 new homes were sold. 25 percent of at the peak.
Everyone knows how much homeowners suffered during the great recession. The next group that suffered the most, or I guess if you look at businesses who suffered the absolute most, it was builders. Many smaller builders went out of business. The big builders, the big publicly traded builders suffered immensely.
So they’re gun shy. They have never gone back and built at scale, even though demographically you can look at the millennial generation and know it was a larger cohort and they were going to come back and enter the market. But put it into context, so from a low of 310,000 in 2011 in 2022, we had 644,000 new home sales.
That’s a crazy number. It’s half of what it was 15 years earlier. Now, population is not exploding. We’ve talked about the birth rate being relatively low in the United States, but the population is definitely a good bit larger than it was at that time. And yet we’re selling half as many new homes.
So what does that mean? To put it into context of whether that’s important or not, we have to look at household formation. And then we have to look at the homes available for those folks to buy. So as we’re forming more households, those people need to live somewhere. They can live in rental housing, they can buy and own a home.
So from that time we’ve seen 15.6 Million households formed from 2012 to 2022. In 2022 itself, 2 million households formed. So some of that we’ve seen some very good people that follow the numbers say that should trend back down. Some of that we pulled demand forward during COVID as people were in lockdown, we had above trend household formation.
So if we look at the 10 year average is 1.3 million households formed. So let’s say 1.3, 1.5 million households formed is a reasonable number. So those people are looking for housing and we would say that over time they will want to buy at a 60 to 65% rate like previous generations.
So if we say that if we’re at 1.3 million, we need about seven or 800,000 new homes a year, and we just talked about we’re selling 644,000 new homes. That doesn’t even account for the destruction of existing home stock. That doesn’t, probably doesn’t occur to most people that believe the number is about a hundred thousand homes a year get demolished because…
[00:14:58] Jeb Smith, Huntington Beach Realtor: Well, that guy that I talked to, [00:15:00] What about a week ago? Believes that the climate change is going to take out all of the houses in the lower areas of Huntington Beach there that’s…
[00:15:08] Josh Lewis, Certified Mortgage Consultant: that’s a future episode.
[00:15:10] Jeb Smith, Huntington Beach Realtor: Those houses aren’t even counted into this.
[00:15:12] Josh Lewis, Certified Mortgage Consultant: That will definitely decrease supply.
So when we look at that, we look at completions again, completions versus sales. Over that same timeframe, 8.5 million homes were completed. So we built 15.6 million households, but we only had 8.5 million single family residences. Now, 11.9 million total units were completed. So 4.2 million multifamily properties. And those could be 2 to 2022 units.
So when we look at that, there are some things that are interesting. Jeb, you’ve talked on the show before about new construction we have around Huntington Beach. Nothing unique about Huntington Beach or Orange County or L. A. County or California in and of itself, other than we’re built out.
So any urban area that’s built out, we basically get, infill developments. Very little land, zero lot line homes, condos that are attached. So if you’re able to buy something that you can own, you’re getting much less land than you got. Generally multiple stories. And we’re seeing more and more what we’ve seen our units built here in Huntington beach is apartments.
We have lots of class a apartments. No one’s building affordable apartments, just really nice apartments. So we’re seeing that just the numbers don’t make sense over the last decade, but also the supply that is being built and brought to market is built for profit maximization for builders and developers of multifamily stuff versus what people want.
So when I relate that back to boomers, having home stock come to market, what is good about that? Or what is positive? Those are homes with land. They’re older homes. And we’ll talk about some of the implications of that and what you need to be prepared for if, and when this stock becomes available.
But it is more of what people think when they say, “Hey, I want to become a homeowner” versus the $1.3 million condos we have around the corner from the office here with attached walls and no land. So from that, basically, where do we leave it?
The national association of realtors says we have a current shortage of anywhere from 5.5 to 6.8 million units in the US. Freddie Mac says we have a shortage of 3.8 million. Now, some other groups believe that number is as low as 1 million. I think 1 million is absurd. I think 6.8 million is probably absurd.
So really we’re three to 4 million units short. Let’s take that figure of 3 million. If we built an extra 300,000 homes a year, it would take a decade to get caught up. And that would put us to 2033. And we’re going to talk about some numbers here, Jeb, from 2027 to 2037. It would coincide with this.
I don’t expect builders to do that. So this excess supply that we think may be coming to market, and we’ll be hopeful that it comes to market, could fill that gap and make housing more affordable as young millennials and Gen Z comes of age and wants to buy homes.
[00:17:51] Jeb Smith, Huntington Beach Realtor: I guess the question, a lot of people are probably listening to this going, “okay, when does this happen? When is all of this going to take place?” So I think it’s important to back up a minute. Let’s talk about [00:18:00] boomers, the generation. So we’re talking about birth years between 1946 and 1964. And based on current data, it looks like the majority, the leading edge turns 80 around 2026.
So we’re 2023 now. So within the next three years, you got the largest majority of boomers starting to hit that 80 year old mark. The leading edge, so the very beginning starts in 2026, and then the peak turns 80 around 2035. And then the tail end is around 2044.
So we’re not talking about tomorrow. We’re not talking about next year. We’re talking over the next 10, 15, 20 years depending on how you’re looking at this. Will it increase supply? I think the answer is yes. Is it all going to come at one time and flood the market tomorrow and drive down prices? The easy answer is no.
But with that, Josh, let’s talk about when the 80 year old, I kept pointing to 80. Why did I say 80? Because that’s typically the age when people start to downsize. So let’s take that a little bit further here and talk about what that number looks like as far as home sales, if that were to take place over the next 10, 15, 20 years.
[00:19:11] Josh Lewis, Certified Mortgage Consultant: So I didn’t run back into the numbers and I wish I had now seeing the numbers that we have here of leading edge at 1946 and the end being 1964, because from 2007 to 2017, we had around 730, 000 boomer sales each year. And I don’t think that’s net sales. And this concept of net sales is important because if a boomer sells their house and they go buy another house, that’s not really increasing supply.
It’s net zero. They sold the house. They bought a house. And they may have sold a family home that a younger person would like to buy and move to a retirement condo. And so it definitely changes the mix of what’s available, but 730,000 per year over that decade from 2007 to 2017. From 2017 to 2027, we are right in the middle of that, the average is going to be about 920,000 per year. So an additional 190,000 units.
[00:20:01] Jeb Smith, Huntington Beach Realtor: So let’s put that into context. So right now. 2023, this year, we’re going to sell around 4 million existing home sales. So if these numbers are accurate based on today, about a fourth of those sales are somewhere of boomer age. Is that fair to say? And that’s merely a guess just based on how we’re doing these numbers, but pretty close to 25%.
[00:20:23] Josh Lewis, Certified Mortgage Consultant: Yeah. And that’s disproportional because we went through the numbers. Boomers make up 20 percent of the home buying age population and their 78 percent homeownership rate should be more than 25 percent of the sales are coming from boomers.
So what we can tell is they have a longer tendency. They stay in their homes longer. They sell them less. They move less. But around age 80, they may have to move in with family. They may have to move into some type of assisted living. They may move on to a cruise ship. We don’t know what they’re going to do, but they’re, they do.
It sounds a lot more fun than other options,
But let’s look at 2017 to 2027, that figure jumps [00:21:00] to 920,000. It’s an extra 190,000 units. But again, we’re six years into that 10 year timeframe. And we’re talking about a lack of supply. So additional 190,000 units has done nothing. Has not helped significantly in any way.
Now, if we flash forward to 2027 to 2037, which is the timeframe where you’re showing, we get more of them. We’re expected to have about 1.17 million Boomer sales. So that would be another 250,000 increase over this 10 year timeframe.
And you may be asking, why are you taking these weird timeframes? It was the best data that was available when they did the survey. They had a complete 10 year study of 2007 to 2017. And they started extrapolating forward using these ages and things that Jeb and I are talking about here. So I think that is reasonable. And the important part is it continues to grow year by year.
We’re talking about averages over a 10 year timeframe, but they start out on the low end and go higher year by year. And if we’re sitting here staring at the fifth, sixth, seventh year of highly limited inventory, that would be welcome. I do not expect builders to fill that gap. If boomers exiting home ownership and bringing net supply to the market, to the tune of three or 400,000 units per year, that absolutely does not create a crash.
It creates additional supply. Supply keeps prices from skyrocketing, going up. And we’ve talked about affordability is a big issue. If we had a 10 year period where homes just track the level of inflation or even below that, it would help normalize prices in terms of affordability, because we do expect at some point, even though it’s not happening day by day, we talked about that this morning, Jeb interest rates will normalize.
We’ll find out what normal is. Is it 5%? Is it 6%? Is it four and a half percent? And then in addition to that, we’ll have incomes increase also on track with inflation. So if this helped moderate home price increases over the next seven to 10 years. It increases affordability, increases supply, makes home ownership more reasonable for folks just like you who are listening at home.
[00:23:00] Jeb Smith, Huntington Beach Realtor: And that’s what we’re trying to convey here is that this additional supply should allow the generations that are up and coming that are going to be coming prime buying age over the next 10, 15 years, a better opportunity to become that homeowner.
Last episode we talked about, will I ever be able to own a home? And part of that is largely due to supply and affordability. And as those things improve. Again, it improves the opportunity for that to happen. So Josh, when we talk about these properties, I think it’s important to talk about the types of properties that are probably coming to the market.
And how that affects potential buyers and how it even affects those selling the properties. But when I talk about characteristics, when I walk into oftentimes 80 year olds homes. A lot like my grandparents home. My, my grandfather passed away in the last five years. My family took that property over. It stayed in the family. They moved in.
And while he did things like the roof and the heating, the furnace, that sort of thing. [00:24:00] The cosmetic upgrades were never really done. It was still original stove, countertops were I can’t even think of the….Formica like that sort of thing. It wasn’t upgraded.
It wasn’t awful. It just, it wasn’t what most people are looking for in a new property. So what I’m saying here is that a lot of these properties are going to be outdated. They’re going to require renovations. Some of them, I’ve got a potential listing, she’s not a boomer but she’s probably 70.
So I guess she’s in the boomer generation. But her house is original. We’re having to sell it as a flip opportunity because it needs so much work. And so I think you’re going to see like a large majority of the homes that hit the market are probably going to need a lot of love.
They’re going to need cosmetic upgrading. Some are going to need more than cosmetic upgrading. Now a portion of them will be nice and fixed up and have really good style, but that’s not the majority of them. In addition to that, many of them Josh are probably in prime locations because they were there before everything was built out.
So they can be a little bit closer to the beach. They can be a little bit closer to the epicenter of different cities because as the population started to grow and those areas were filled, builders started to build on the outskirts and it just kept going out further away from the coast and further away from these major cities.
So a lot of the boomers that are passing on. Are going to have houses in locations that are desirable, which is a really good thing.
[00:25:24] Josh Lewis, Certified Mortgage Consultant: And let’s go back. One of the studies that we reviewed here looked and said, this is not an even distribution. These people don’t own everywhere throughout the US. There’s higher populations. And where those higher populations are, there may be a disproportionate amount of supply coming onto the market.
Jeb, you hit on probably the best one or the most desirable one. A lot of these people. We’ve talked about older people not only have higher home ownership rates, they have higher incomes, they have higher net worth. So a lot of these are in nicer areas, nicer neighborhoods and areas where homeowners get into and park for 25 years.
We may see more supply in some of those areas. So is that somewhere where a Gen Z buyer is gonna buy their first home? No. But maybe the older millennial is ready to move up and can get into one of those nicer homes. So that’s your best case scenario.
We also have two other types of areas, Jeb, that are impacted there. A lot of the areas in Florida. We all know people retire. They want to go somewhere warmer. They want to get out of the snow. So when you have a disproportionate amount of older citizens. That could be additional supply and could constrain prices more there than in other areas. So whether that’s Florida, Arizona, nice warm markets that retirees flock to.
The last one is some retirees don’t have the luxury of having enough money to sell their house and go buy a cool condo in Boca. And they’re in Cleveland. They’re in the rust belt. And what has happened is there has not been a young population growing behind them. So you may end up with an area that has had depressed home prices or has not had as much appreciation as we’ve seen in [00:27:00] other areas have additional supply there.
So depending on where you’re at, we always talk about real estate is local and knowing location and dealing with an expert realtor that can guide you and advise you on that. It’s not going to be equal across the country. Every area is going to be different and it makes it really important that you’re dealing with an expert.
[00:27:16] Jeb Smith, Huntington Beach Realtor: When I hear that, Josh, I immediately think Palm Springs, older generation, people go there to retire. Now there is a younger generation buying homes out there, but I would say I’m guessing, completely guessing, I would say that 70 percent of the populations out there is probably over the age of 60. I mean, merely a guess. You probably have better insight into that, but areas like that where people go because the weather is good for the majority of the year. It’s warm because it’s good on their bones.
They don’t have to deal with the aches and the pains and all of that of the cold weather. Those are the areas that people are flocking to and where you’re likely to see some inventory come to the market. So Josh, with that said what are challenges for home buyers that are looking at properties like that?
Because we know it’s coming, but how are they going to be affected when trying to take advantage of something like this?
[00:28:03] Josh Lewis, Certified Mortgage Consultant: Well, it goes back to what you’re saying. What does this supply look like? Some of this is generational. Remember our grandparents when the house needed to be painted, they didn’t call a painter. They went down to the hardware store and they bought some paint.
And a lot of things were similar. Bathroom needs to be redone. Well, I need to grab a book and learn how to set some tile or call my uncle who knows how to do it and come over and help. So as you said, the shift from that to now in the last 10 years, everyone watches HGTV and wants a turnkey, beautiful home.
A lot of these homes are well maintained. In good condition, but even if they were renovated, a lot of what we see, I saw a house the other week and I’m like, someone did an awesome renovation 20 years ago. So they’re 60, they retire, they buy a house, they do a bitchen renovation and it’s awesome. Well, now 20 years later, styles, trends, colors, everything is different.
So the big thing we’re looking at, most first time buyers are scraping up a down payment. Going to the max of their budget of what they can qualify for. How do we do renovations? How do we update these properties? It could be on the realtor side. You’re helping the sellers to renovate these properties before selling them to get top dollar.
It could be middlemen. Investors buying these properties, fixing them up and then selling turnkey homes into the end market. Or rehab and renovation loans. We’re talking about 203k, home style renovation options. All of those are potential options for improving that stock.
It also comes down to a challenge, not so much, but we did an episode a month ago. Jeb, do you relocate to a lower cost of living area? This isn’t necessarily a lower cost of living, but do you relocate to one of those areas that has More of this supply coming on the market and has more affordable homes.
It’s something that you have to consider. And everyone has to answer that for themselves. We’ve said a million times, I think homeownership is that important that if it requires moving to a lower cost of living area, it will make a big difference in the quality of your life over the long haul. But those are the big ones that I see.
What are you seeing Jeb?
[00:29:58] Jeb Smith, Huntington Beach Realtor: No, I think that’s it. It’s [00:30:00] the renovations. Buyers having the money for the down payment in addition to the renovations, right? If they’re not doing a renovation loan. Those are probably the biggest challenges happening in the market. Because I think location’s good and it’s just going to be a mindset thing.
People are going to have to understand that, “Hey, the house isn’t perfect.” We’re going through a time in real estate where people feel like they need to buy their forever home. And it’s ” no, you’re buying a home that gets you in the game.”
And at some point in the future, maybe you’re able to leverage that home, buy something else, or maybe you turn it to a rental, whatever. It’s overcoming some of that mindset out there that, Hey, maybe the first house you buy or grandma giving you her house, which we’re going to talk about here in a minute. It’s not going to be perfect. It’s just, it is what it is.
And you’re going to have to work with it in order to make it your own at some point in the future. So that kind of brings me to the point that I often state when we talk about this sort of thing is just because a boomer turns of age doesn’t mean their home is going to come to the market.
I think the idea here of discussing some of the things that people don’t necessarily talk about when they talk about the boomers, they just talk about, they’re gonna have to sell their home. Yeah. Some of them will, but not everyone.
And so we say here, financial legacy. 50% of American homeowners net worth is in home equity. But here’s the key is a lot of those seniors want to leave that net worth to their children because they didn’t have it as kids. Many of them were poor and grew up during, times in the market where there just wasn’t a lot of wealth out there.
We’re in a different time now, but parents want to leave that to the kids. They want them to have a better life than they had. And I see it now. I see grandparents, parents helping their kids buy homes now because they believe, ” if I don’t help my kid get into real estate now, there’s a chance that maybe they don’t buy real estate or not able to buy real estate because of rising costs, because of rising prices” and some of these other things that we’re talking about.
Pulling equity out of property to help people, grandma giving the inheritance of money now to help the younger children buy property is what I see. In addition to parents, grandparents leaving the home to the kid, and then that kid decides to move into it potentially Josh, because they’d never owned a home.
And this is their opportunity now to become a homeowner. That’s what I see a lot of. We’ve had friends where people pass along and one kid buys the other kids out and now they’re a homeowner in this situation. So I think that is what is going to keep some of that supply off the market.
How much we don’t know, but it’s important to realize that just because someone passes along doesn’t mean that’s a new home coming to the market. There’s different things that can be done with that property. Yes, it could be a sale or it could be turned into a rental or it could be shared as a family home.
There’s other things that could happen with that real estate where it never becomes available. It doesn’t really
[00:32:53] Josh Lewis, Certified Mortgage Consultant: A thousand percent. Jeb, we have another client that you and I were talking about it last week. I did a loan for their parents. Their parents [00:33:00] happened to be boomers. Just retired in the last year or two. Well, they inherited their mother’s home when she passed and it was in a bitchen neighborhood.
They sold one of their properties. They did an awesome renovation and that’s going to be their home. Well, guess what happens in 15, 20 years when those folks pass. The clients that you and I know are going to move into that home.
Now they may sell their home or they may say, Hey, I got it in 2017. I have a bunch of appreciation. I have a 3 percent mortgage rate. I’m going to keep it as a rental. So we have what would normally occur. And we have the distortions from all of the Fed intervention and all of the people out there sitting on lots of equity with really low interest rates and the ability to rent something out at a profit inheriting these properties.
So everyone’s situation is different. Lots of families, there’s not a lot of money just laying around. So when mom passes away, we have to sell the house, pay off some bills and then split up what’s left. So this is absolutely going to lead to additional supply above and beyond demand. Moderates prices.
I don’t think we’re looking at a situation where it decreases prices. Definitely don’t think this is anything that would cause a crash. But in this perspective, it’s a good thing. We’re coming off three or four years of massively outsized gains. We’ve talked about on the show a million times that over 50 years, homes have appreciated one to 2 percent above the rate of inflation.
Well, we had a two, three year period where they went up, 10 times the rate of inflation. So what we would expect going forward is we have to have a period of moderation. Of either the correction where home prices drop or a period where home prices remain stable.
So the flip side to this is, if you own a home and you’re expecting, “Hey, over the last 50 years, we’ve got 5. 4% increases annually.” We may not get that over the next 10 years as prices normalize and moderate. Affordability has to improve to increase demand across the board. And we’re going to see some additional supply from builders, from boomers.
It’s going to happen, but there’s nothing out here for anyone to be alarmed about. If anything, my take from this is a positive for future buyers as some additional supply comes and takes the pricing pressure off.
[00:35:06] Jeb Smith, Huntington Beach Realtor: No. And one thing we didn’t touch on that I do want to touch on real quick before we wrap this up is the idea of why haven’t we started to see more of this? And it’s because a lot of these boomers are aging in place, right? The person that owns the house that they bought for $30,000, it’s now a $2 million house. Yes, that actually happens here in Southern California.
What happens is when they go and they say, I’m going to sell this property, there’s a couple of things that come up. One is the potential for capital gains. Because a lot of them now are widowed or what have you and so you got a large amount of capital gains that have happened since taking that place where they’d pay taxes on it.
So it’s better to leave it and pass an inheritance through a trust or something to a family member, because there’s less tax implications, but they’re also the idea of, “Hey, listen, I could sell this property where my property taxes are really low. I may or may not have a mortgage on it at all. And now I’ve got to go buy something.”
Well, guess what? I go buy something, chances are it’s a [00:36:00] lot less square footage. The area is probably not quite as desirable. And more importantly, the price isn’t really that much different in many of these circumstances than what they currently own because of how much homes have appreciated.
It sounds crazy, but here where we live to buy a little single level property near the beach, you’re looking at $1.1 million, $1.2 million, $1.3 million for some of these properties. And people go, why would I sell my big house that I could live here, I’ve lived here my whole life to go down. I don’t want to do that. It’s not the quality of life that I want to live.
And on top of that, we talk about location, Josh. People that are older typically are ground in their ways. I’m only 40 and I’m very much like that, but they go to the same doctor, they go to the same grocery store, they do the same little route every couple of days to go on the same little walk, everything.
And so they want to keep that routine the same and they don’t want to live, move to an area where they have to change doctors. They want to have, they want to be in that same location. And that keeps people saying, you know what? Yeah, I can move. I could downsize, but I’m just going to stay here because quality of life is much better.
And somebody else will deal with this when I’m gone. And that’s what has happened. And that’s why you’ve seen this delay in some of these properties actually coming to the market.
[00:37:16] Josh Lewis, Certified Mortgage Consultant: You’re a hundred percent correct that we all get super set in our ways. I’m only 50 but there’s a handful of parts of the country that I love visiting. And I say, “Hey, I could see retiring there.” And just like you said, when you start thinking about it, you go, not just doctors, your gym, your grocery store, your friends, you’re not going to see them as much if you’re 1500 miles away. There is a lot of inertia telling you to just stay where you’re at.
And, you threw out that number of, Hey $2 million downsizing to a $1.2 million little house here. Those numbers play out everywhere in the country. Grandma bought a nice house. Maybe that thing’s $575k now in a different part of the country. And she goes, I’ll just sell and get a nice little single level. She goes, wait that’s $425k. So after I pay my fees, I’m going to put $70,000 in the bank. I think I’ll just stay where I’m at.
So there’s a lot of reasons to think that much as we started the show saying boomers did not pull money out of the stock market in mass, like was expected. We also are seeing them not moving as we expected. And when they do pass their heirs are not doing what was expected of just throwing a for sale sign in the yard.
A lot of them are keeping them and moving into them. A lot of them are keeping them and renting them. So this is absolutely going to bring additional supply. That should be a good thing, but we have to watch it, see how it plays out. Cause we’ve got another 15 years here of boomers aging out.
[00:38:38] Jeb Smith, Huntington Beach Realtor: And that’s the thing is it’s just, we bring this episode up as something to pay attention to. Don’t let the media get you turned sideways just because the silver tsunami is coming. Yes, it is coming, but it’s not coming tomorrow. It’s coming over the next 15 to 20 years, which means additional supply coming to the market, hopefully improving affordability and allowing you to become homeowners when [00:39:00] it’s right in your life.
So with that. This episode again came along just because people are often talking about these things and wanting more, intel and insight into it. So if you have something you want us to cover, do us a favor, drop us a line, send us an email. Let us know the kind of topics that you want to hear and we’ll be sure to do it.
But until next time, we appreciate you being here. Au revoir.
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