What this mismatched market means for real estate investors
Sweeping demographic changes are underway in the U.S. as tens of millions of Baby Boomers age into retirement. Between now and 2030, the number of Americans aged 65 years and older will increase to 73 million people, accounting for 30 percent of the population. Roughly 70 percent of them will require long-term care services after age 65, and millions will transition out of their homes and into assisted living communities or exchange their larger homes for smaller ones. In fact, Baby Boomers are set to leave their homes in record numbers: within the next decade, more than a quarter of currently owner-occupied homes will become available. Meanwhile, tens of millions of Millennials will be starting families and looking for homes in which to raise their children, and the newest generation (Generation Z) will be seeking out starter homes.
But there are serious problems looming that threaten to upheave housing markets, and America is not prepared to handle them. A recent study by Arthur C. Nelson, a University of Arizona professor of urban planning and real estate development, predicts that millions of homes owned by Baby Boomers will become unsellable due to demographic and preferential shifts among Millennials and Gen Zers over the next couple of decades. The result could be a glut of homes that could grow as high as 15 million by 2040, with Baby Boomers either unable to sell their homes or selling them at significant losses. At the crux of the matter is a mismatch in home-buying behaviors by younger generations leading to a severe imbalance of supply and demand by housing types.
Baby Boomers have been the most influential generation on land-use patterns and housing demand in the history of the country. The very concept of suburbs started with their housing demand, since the cities had no room to accommodate the massive numbers of families with children. But as the Boomers get older, their housing demand is changing from large homes and large lots to smaller homes or assisted living communities.
Each generation has its own housing demand characteristics, both as they age and as their preferences change. And although millions of Baby Boomer homes are on track to be offloaded, the tens of millions of Millennials and members of Generation Z looking for homes either may not be able to afford Boomer homes or simply will not be interested in them, opting instead for smaller homes in walkable communities instead of larger lots in distant suburbs. Studies show that the younger generations are looking for townhouses and smaller lots in areas that are bikeable and walkable. This is coupled with the fact that the newer generations are a lot smaller than the Boomer generation—there won’t be enough of them to buy all the homes that the Baby Boomers want to sell. The market is simply not sufficient for millions of America’s senior households to sell their homes. This mismatch will lead to an excess number of homes trying to be sold relative to the demand.
Nelson suggests a couple of possible solutions to help cushion the economic blow to the millions of seniors who will eventually be trying to sell their homes. One suggested option is to offer the senior homeowners money to sell their homes to federal agencies, who would raise the homes, tear them down and reassemble land into larger open-space areas. Another suggested solution is facilitating the purchase of homes from seniors to groups who would turn those homes into rental homes. Ultimately, the reality is that no policies exist to facilitate the changes ahead.
How should residential real estate investors interpret this information? Residential real estate investors are posed to be able to reduce the impending shock of too many seniors trying to sell their homes to too few younger, uninterested buyers, and we should take action now.