For many baby boomers, their house is a principal component of their nest egg. For decades, millions of Americans would buy spacious homes to raise families. Over time, they might upgrade and remodel the home, adding value. Then, after the kids have flown the coop and as retirement nears, they would sell their home and buy a smaller retirement-friendly house, perhaps in a retirement community or warmer climate.
This process would often net them a substantial profit, which would then go towards retirement. However, demographic and economic changes have made this process much less reliable and predictable than in the past. For one, baby boomers currently own more homes than anyone else. This shouldn’t come as much of a surprise. After all, baby boomers were a particularly large generational cohort.
The problem arises when this massive population segment begins to sell their homes as it could potentially create a glut on the market. It’s estimated that between 13 to 15 million Americans over the age of 65 will be exiting the housing market starting in 2026. This would mark a 42% increase compared to the same age group from 2006 to 2016. If enough boomers try to sell their homes at the same time, supply could quickly outpace demand, which will push prices down.
Meanwhile, changes in housing preferences and other economic factors may discourage millennials, another large cohort, from buying boomers’ homes. High supply coupled with changing housing preferences could have a dramatic impact on the real estate market.
Lower sales prices resulting from this potential housing glut may compound an already looming retirement problem for many boomers – low levels of savings. A study by Boston College found that the typical baby boomer has just $135,000 saved up in their 401(k) and IRA accounts. This data may be overly optimistic because the Economic Policy Institute found that the median retirement account savings among people aged 56 to 61 is just $17,000. And boomers may not be able to count on social security as a financial lifeline because of potential cuts in benefits.
Given all these risks, it’s vital for boomers to properly plan for retirement and to closely consider the impact that stagnant or even declining home values could have on their financial situation. Before considering that impact, let’s dig into when and why boomers may find their retirement constrained by their home equity.
The Times Are Changing for the Housing Market
The 2008 financial crisis was deeply rooted in the real estate market and mortgages. When the crisis broke out, real estate markets suffered a severe correction, with home values plunging. The Great Recession was the first country-wide collapse of the real estate market in modern times. Up until that point, homes had steadily risen, quickly recovering from or even shrugging off past recessions.
The Great Recession changed everything. Americans learned that the real estate market wasn’t as invulnerable as it seemed. Some real estate markets have since recovered, reaching their pre-recession values. Some hot markets, such as Atlanta, San Francisco, and Boise Idaho, have even greatly exceeded their pre-recession levels. Many retirees in these communities may be able to secure a substantial profit for selling their home.
Still, many markets remain stagnant. For one, the urbanification of America has greatly increased in the years since the Great Recession. Data from the U.S. Census Bureau’s Population Estimates Program shows that from 2010 to 2017, America’s 50 largest metropolitan areas enjoyed the largest net increases, with most cities recording double digit growth. Meanwhile, America’s rural heartland is suffering population loss for the first time in history. While the declines have been moderate, they have also been consistent over the last several years.
Millennial Preferences Will Impact Real Estate Values
Within metropolitan areas, some millennials are passing on the suburbs. This is important because millennials will be generating much of the demand for housing during the next 20 years. Their preferences will have a major impact on real estate markets.
Indeed, we’re already seeing the impact of their choices. After decades of neglect, many downtown cores, from Chicago to Seattle, have grown rapidly in recent years. Many millennials are showing a preference for living in highly urbanized neighborhoods. Doing so allows them to live close to their knowledge economy jobs and affords them with the amenities of a large city, such as easy access to hip restaurants.
Many baby boomers, on the other hand, bought homes in the suburbs where they could raise families in peace and quiet. They could also avoid traffic congestion and enjoy lower crime rates. Thus, while there is a lot of demand for downtown condos and townhomes in many cities, many boomers simply don’t own such properties.
Perhaps millennial preferences will shift towards the suburbs as they start families. There’s a major problem with this hypothesis, however. Millennials are delaying parenthood, often skipping it all together or having fewer kids whey do decide to start families.
According to a Morning Consult/New York Times poll, 64% of millennials cited expensive child care costs as one major factor in decided to have fewer children. Nearly 50%, meanwhile, cited worries over the economy, highlighting the scars created by the Great Recession. Another 44% simply said they couldn’t afford more children.
Elsewhere, research found that a third of millennials simply don’t want children. This data suggests that demand for family-friendly, suburban homes could be detrimentally impacted by millennial family choices.
Other Factors Discouraging Millennials From Buying Homes
Beyond family choices, economic factors are also discouraging some millennials from buying houses. First, prospective buyers generally have to put down large down payments. Then, they have to pay for the mortgage, insurance, taxes, upkeep, and all the rest. At the same time, workers in the modern knowledge economy often end up jumping not just to different companies every few years, but potentially different cities and regions.
Then there’s student loans. Many millennials are struggling to pay down their debt. Currently, there is more than $1.5 trillion outstanding student loan debt. Researchers at Brookings believe student loan defaults could reach as high as 40% by 2023. Others have found that student loans are making it difficult for millennials to save up to purchase a home.
All of these factors and potentially more may be tamping demand among millennials for housing. In many cases, renting may be more attractive, especially for those millennials who saw the collapse of the housing market during the Great Recession. In other situations, millennials may want to buy a home but lack the financial resources and stability to do so.
Uncertain Housing Market Makes Retirement Planning Even More Vital
The demographic changes and headwinds in the real estate market make it all the more essential for retirees to prudently plan for retirement. Even if your home has recovered or even made a slight gain compared to its pre-recession values, there’s no guarantee it will hold its value by the time you want to sell. This will make retirement planning all the more essential.
To be sure, it’s not all doom and gloom. Just as urban cores are going through a period of revitalization, suburbs may someday enjoy their own upturn. While the demand for boomers’ housing from millennials remains uncertain, increased immigration could absorb some of the supply. Regardless, retirees should be cautious when considering these factors. The maxim “hope for the best but prepare for the worst” is sage advice when it comes to retirement planning.
One sound approach to retirement planning is to use a retirement calculator to project your situation under different scenarios. Where will you be if you only get half of what you expected for your home? How about 75 percent? Or a 110%? Good retirement planning tools make it easy to change assumptions and to see how your financial situation is impacted.
Considering multiple scenarios is extremely important. Baby boomers cannot take their home equity for granted like past generations. With social security facing financial difficulties and the housing market less certain than in years past, it’s vital for boomers to take charge of their financial well-being. Prudent financial planning now could save a lot of headaches and heartache later on.