May 13, 2020
We have been taught that real estate prices are driven by location, inventory, and interest rates. I will argue all three are important to keep an eye on, but we have not been taught that the most significant driver is the buying AND selling patterns of American consumers Based On Age.
The primary reason residential real estate prices are at nose bleed levels is thanks to 76 million people born between 1946-1964 (legal, illegal, legitimate and illegitimate) that showed up in these United States of America. Prices rose as a direct result of unprecedented demand. In fact, there is no other country in history where so many people came into being during the same twenty year period. It’s also the first and perhaps the last time such an event will occur in U.S. history.
Thanks to the U.S. Census Bureau we can see the buying and selling patterns. Please recognize that the patterns have held irrespective of high or low interest rates. In the early 1980s when Boomers were entering the work force interest rates were 16% but that had no effect on educated well paid young people with their high demand for buying homes. The age most Americans buy their first home was 31. It is now 37.
The age of 41 is when most Americans have purchased their biggest home. Again, Boomers can check box 1 and box 2. From 1980-2000, 40% of all of the homes purchased in America were on lot sizes of 1 - 10 acres in size. That was the Boomers buying the biggest house they will ever own during a 20 year period. Each household thought they were doing something special. When in fact we were just following the herd.
Today it takes 8 to 10 and even 20 times everyday incomes to buy an everyday house. Healthy real estate prices are a good thing, indicative that the area is an attractive city or country to live in with a good standard of living. And wages paid to employees becomes higher to compensate for that higher standard of living, along with more expensive office, store, plant, and warehouse costs. That’s one of the reasons we are losing key industries to lower cost countries.
As Professor Robert Shiller put it October, 2019, there are bubbles everywhere. Bubbles in the bond market, the stock market, and the residential real estate market. And every 7 year old in the world understands all bubbles burst. In fact, every child knows the bigger the bubble, the bigger the burst.
High real estate prices past a normal level of 3-4 times income in good cities only benefits the older people who already own real estate and who are going to work, but they produce less, and then die. It kills the standard of living for the new up-and-coming generation. It only encourages more focus on fixing up and flipping homes, instead of investing in productive capacity to produce real goods and services and for export and global competitiveness.
So prices go up when demand is high and it stands to reason that prices go down when demand declines. Boomers constitute 24% of the U.S. population and it is noteworthy that the age most Americans sell their homes is age 78. Boomers this year turn 55-74 which means we can clearly see they are increasingly likely to sell. And it is important to keep in mind the average age of death in America is mid-80s.
Now is the time for those with a lot of equity to consider releasing that equity ahead of the herd. As an old Eagle Scout hiking 50 miles across New Mexico I know when you are in the middle or the back of a herd of cows, the view and the smell do not change. You must get ahead of the pack. Or be sorry. Millennials, on the other hand, may be wise to keep their powder dry to see if the market moves in their direction. I would not be surprised to see home prices in Cleveland decline by 13%. And the decline for both coasts to be 50%-60%. When 24% of the population goes to heaven, and the 130 years of residential real estate supply remains stable, it is reasonable to expect home prices and rental income to go straight to hell.