July 13, 2009

Generations: 74 Million
Young Adults Will Help Create
The Next Housing Boom

As we’ve noted consistently in the past six months of Profit Lines, it’s vital to understand that recovery from this terrible market won’t happen overnight. We expect another foreclosure bubble when Alt-A loans and Option ARMs reset in 2010 and 2011, and with unemployment rates still rising, we don’t foresee significant recovery in the next three years.

After that, however, we’re anticipating a sustained, healthy stretch of increasing sales, values and homeownership rates. What’s more, the upswing won’t be built on questionable lending practices, overextended buyers or insane debt-to-income ratios. Instead, it will be based on a combination of pent-up demand and demographics. And the youngest group of adults, Generation Y, will provide much of the spark.

Another massive wave

Born between 1980 and 1995, the members of Generation Y – also known as the millennials or echo boomers – are like a pig in a python. Aged 14 to 29 now, they comprise a block of 74 million potential buyers, nearly as many as the 80 million baby boomers born from 1946 to 1964. When you think about the influence the boomers have had on virtually every aspect of society over the past 40 years, including the housing industry, it’s fascinating to anticipate the impact of another wave that’s just as massive.

The oldest millennials, now in their late 20s, are nearing the average age of first-time homebuyers – the National Association of Home Builders puts it at 33 – and many of them are already taking advantage of attractive buying conditions. They’re moving through the household formation years of 25-44 and will soon replace Generation X (the 48 million people born between 1965 and 1979) as the primary first-timer group between 29 and 33. They will do so in much greater number.

Interesting look at birthrates

One reason for optimism in 2013 and beyond is the U.S. birthrate through the late 1970s and into the 1980s. Sue Rossi, a RE/MAX Broker/Owner in Crete, Illinois, has been studying the correlation between birthrates and housing stats for several years. Her well-constructed theory, which she has shared in her region as well as with National Association of Realtors leaders, boils down to this: A drop in births triggers a drop in sales 33 years (or whatever the average age of first-time buyers) later.

Although the connection doesn’t hold up every year – a variety of factors can push sales up or down – it’s interesting to see how shifts in births often do match shifts in home sales three decades later. Consider that the four lowest birthrate years since World War II occurred in 1973, 1974, 1975 and 1976 (see chart below). Add 33 to those years and you have 2006, 2007, 2008 and 2009. We all know how sales went in that time frame. Many things contributed to the plunge, of course, but the mid-’70s birthrates of less than 3.2 million – sandwiched between the 4 million-plus years of baby boom and Gen Y — certainly didn’t help. This baby bust created a 25% reduction in available “average aged” first-time buyers each year, with the cumulative effect even greater.

No one should underestimate the power of first-timers. In addition to their own purchases, these buyers start vital chain reactions by enabling their sellers to move up themselves, buying from another family who’s now free to move, and so on. Without them, the push at each level is missing. Millennials will begin to turn 33 in 2013, and with birthrate levels throughout the 1980s climbing steadily back toward baby boom heights, there will simply be more young adults ready to enter the housing market.

An extremely confident bunch

Millennials are an interesting generation. The children of boomers, they’re on the verge of becoming the major consumer force. As a group, they’re less well off than their parents were at the same age, but they don’t seem to mind. Despite being burdened by steep college loans, higher prices for everyday goods and an uncertain job market, they’re also extremely confident, mobile and positive about their futures. Many are marrying earlier, without large nest eggs. Others see moving back home as a prudent way to save some money and wait out the economic turbulence.

Those who’ve entered the housing market — drawn by the perfect storm of historically low interest rates, attractive prices and the $8,000 tax credit — expect much from their Realtors. They want access. They want answers. And they want ongoing communication through text messaging. As a RE/MAX Associate in Denver told us the other day, “Our older clients make appointments with us. The younger ones are liable to show up at any time, wanting us to take them to a house they just saw online. They just want to know, ‘How fast can I get the information?’ and ‘How available are you?’”

Their expectations in housing are different too. Their lifestyles are active, urban and social, so they generally favor smaller homes near recreation, restaurants and friends. Many would just as soon live in a townhouse or condo as in a large single-family home — mowing the yard is not what they want to be doing on a Saturday afternoon. And though some embrace the charm of older homes, most prefer newer buildings filled with the technology and modern amenities they grew up with.

As the millennials continue to age, their choices will have a major impact on the housing inventory and the direction of new construction. Already, urban and new-urban developments are sprouting up around the country. Eventually, some housing types not fitting their needs, in both urban and suburban settings, may become obsolete.

Boomers in waiting mode

The oldest baby boomers, meanwhile, are now in their early 60s. Many have put their retirement and relocation plans on hold because they’ve lost 40% of their 401(k)s and a large portion of their home equity. Some are scared to death because their plans to retire and live on savings and profits from their home sale have been sidetracked. Many can’t afford to leave the workplace, and instead are paying off credit cards, saving money and finding ways to extend their careers.

Instead of retiring and moving to Arizona or Florida, many boomers will likely downsize locally and stay closer to their children, grandchildren and friends. Trouble is, with the jumbo mortgage market as tight as it is now — though it is showing signs of improvement — other people aren’t positioned to buy their homes. And with the ongoing drop in prices, many boomers don’t want to sell now anyway because they know what their home was worth four years ago and are reluctant to sell at the price they might get today.

Boomers, with more urgency than the younger groups, are focused on saving as they try to rebuild their financial lives. The vast majority, though, have been spenders and consumers their whole lives, and although perhaps 10% will hold on to their new-found frugality, the other 90% will return to old habits once the storm has passed, the recovery is in full swing and their confidence has returned. That’s not a bad thing at all; the economy needs people to spend money, as does the housing industry. As calm returns, the boomers will start to retire in massive numbers, opening workplace opportunities for younger people to advance and earn more.

Growing demand

Despite the current lack of buyer interest, a reservoir of pent-up demand is building in every age group: Gen Y couples who are content with renting or living with parents until their careers get going and their incomes cover their lifestyle expenses with something left over; Gen X families who have outgrown their homes but are delaying moves because of employment concerns and the tough economic times; boomers who no longer need five bedrooms but are hunkered down and postponing their downsizing or relocation plans. Eventually — we think it will be in four years or so — they’ll all feel secure enough to take the next step. Sales will rise and our industry will return to normal, although it will be a new, different normal than before.

Of course, many other factors — the rise of immigrant and minority buyers, the continuing struggle with foreclosures, the increase of women as single homeowners, the health of the overall economy, the state of homebuilding, and much more — will also help define the new landscape.

Ultimately, although the styles and traits of each of these three generational groups are radically different, the course of life in America remains fairly predictable. And as always, the flow of home sales depends on sizable groups of people following patterns we’ve seen for a century: People in their 20s get married, buy homes and start families; people in their 30s and 40s outgrow their houses and move up; people in their 50s, 60s and 70s sell their houses and buy something smaller or move into retirement units. The current recession, for all the damage it’s done and continues to do, won’t change that basic equation.

We still face many challenges before the millennials fully flex their buying muscles and help put housing back on track. But in addition to working with distressed properties, cutting expenses, considering mergers and doing the other “right now” things that will help you succeed in today’s difficult environment, take time to look around your community for signs of this growing economic force. And then start thinking about how you can connect with it. The key, as with most things, is to be ready before it arrives. 

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