The shape of residential real estate to come

Demographic trends are among the strongest forces that shape real estate markets. Different generations have different housing needs. The largest and wealthiest generation, the Baby Boomers, is reaching retirement age, which will have a profound effect on the national economy and the supply of available housing.

Let’s take a look at the major generational cohorts, examine their real estate needs, and discuss what can be done to meet those needs.

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Greatest Generation

Anyone born before 1946, now age 70 or older. Their housing needs are mostly satisfied with current housing, which they typically own. They currently are not considered in the buyer’s side of the equation. The only real estate they may purchase in all likelihood is a burial plot or move into a retirement center. Most currently are living in inventory that will come to the market in the next ten years.

Baby Boomers

Anyone born between WWII and the Vietnam War, the years of 1946 through 1964, now age 50 to 69 presently. This generation began when the Greatest Generation got home from the war and started families. Much of today’s housing stock was built with this generation in mind. Many are on their 5th to 20th home purchase. Many in this generation are interested in moving down without sacrificing the amenities of their current lifestyle. The larger homes they vacate will be “move up” inventory for future generations who want to move into their established neighborhoods.

Generation X

This generation’s timeframe is from 1965 to 1984, now aged 30 to 50. As you notice in the chart, their population is not as great as the Baby Boomers. This means that the US resale housing stock has more than enough homes designed for move-up buyers.

This group also had the unfortunate timing of reaching the prime age of home buying just as the recession hit. Their ability to get economic traction has been challenged due to high unemployment, lack of wage increases, and the loss of over $7.5 trillion in equity as the housing bubble burst.

Their inability to ”move up” as fast means there is more move up inventory than potential buyers. This has not seemed to affect values presently, but could in the future.

Generation Y

Also known as “Millennials”, this generation was born between 1982 through 2004. Like Generation X they have not been able to get economic traction for home buying. And due to the financial meltdown and recession, many have delayed moving out from their parents, having children, or getting married. The social pressure to start families is not as great as in previous generations. Their decision to delay home buying affects the previous generations, as they have fewer eligible buyers to sell to.

Post-Millennial

This is the next generation, kids that have been born in the last 10 years which currently lack a catchy generation name.

The youngest generations have a need for more entry level housing. First time home buyers are way under supplied in today’s market. Those born in the 1980s (currently 26—35) have delayed buying a home, creating pent-up demand.

I define “entry level” housing as a newly constructed home priced below $200,000, usually on the outskirts of urban development where land is cheaper. This historically has been 35+% of the home buying market. Currently if we look at our inventory in Texas and the nation it is less than 7% of the total market.

The ability to address this market is near impossible, due to the cost of land, materials and labor. Principally, land costs and development are too expensive to justify building a modest home. Additionally, labor and materials continue to escalate 15 to 22% annually with greater demand nationally.

With the cost of land and infrastructure it is hard to deliver a 50’ front production lot (minimum allowed size in most communities) for less than $40,000 in most metros and their suburbs. That $40,000 lot equates to a minimum of $200,000 home in most Texas metros. Builders also downsized during the recession, and they don’t have the same capacity to build in volume that they once had.

Today, if you’re building a $400,000 house, you’re going to make more money than if you were building a $200,000 or $300,000 house. All of this leads to sticker shock for consumers who look at entry or move up in new homes. Resales begin to look more attractive due to location or price difference.
So what are the needs of the future housing market?

More entry level product

The obvious need is entry level housing, $200,000 to $250,000 and below. Municipalities need look at allowing smaller lot sizes and subdivision of existing lots, allowing higher density and greater supply. Affordability cannot be legislated or regulated by a municipality, but smart regulation should encourage abundant housing, which makes housing more affordable for all.

Creating this entry level opportunity helps new families build equity and become home buyers. Many of us in the Boomer generation bought and sold those entry level homes with enough equity to move up and continued that path to our current homes. By addressing this market we assure the older generations built in buyers and help new families build equity.

“Move up” ($300k – $1mil) inventory is abundant

The sellers in this category need to realize that there is a lot of competition at these price points. Their ability to sell for the price they want is predicated on how much inventory there is at their price point and location. If a home in this category is on the market for over 90 days, pricing and demand are likely the culprits. This is still a sellers’ market, but there is a dwindling number of buyers for this category. Sellers need to expect a bit more negotiation at these price points. Builders need to realize that there is much more competition in this price point.

There is a need for more active adult / move down inventory

Boomers want to move down as they become ‘empty nesters’. Not many builders other than Del Webb build for them. Builders need to look at that market and understand it better. Most ‘move down’ clients do not want to live farther out in the suburbs. They do want a higher level of amenities in their home. Most are fearful of putting their homes on the market and having it sell before they have found something else. Lenders / builders need to bridge that financing gap, allowing the ‘move down’ client to purchase before getting their equity from their present home.

Home building is still depressed

As a nation we are still over 50% short on home starts and sales. There has been an average of 832,000 home starts per year in the last five years, with a US population of 312 million. Compare this to the next lowest production of 1,398,000 units per year in the 1950s, when the population was around 175 million. That’s 40% less units for 78% more population! The point is the market is still gaining traction. Consumer confidence is up, but uncertainty and doubt are at the back of many consumers’ minds when selling or purchasing a home.

Multifamily boom

The last time we saw apartment and multifamily building of this magnitude was in the 60s and 70s when the Boomers were reaching young adulthood. 350-600k units per year was the norm and multifamily was 25-30% of all production. We have not seen production near that level until the last few years.
With near record numbers of apartments built the last few years in Texas metros, expect rent concessions. As strong as rent escalation has been in this state it should slow in 2015-16. Even though the actual number of residences created has increased each year, the housing mix continues to tilt away from single family to multifamily. Expect higher density product to continue gaining traction on single family.

What this means is that builders and sellers need to review their market strategy carefully. Realize where the bulk of buyers are. Although it is a sellers’ market, that is all predicated on demand and inventory in each price channel.

All of us will have to work harder to understand the market needs and make adjustments. The good news is that if you live in Texas, and these problems present themselves because of high demand and continued employment growth. We all just need to be aware of the demographic trends that will shape our industry.

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