retire, and California Trembles
posted by First Tuesday Editorial Staff | November
Californians are growing in number, at 13% of the state's population
in 2013. This is a 4% increase from the prior year, mirroring the
2% growth in the numbers of their Generation Y (Gen Y) children.
A whopping 75% of Baby Boomers are homeowners today and will remain
so in retirement, though most will sell and downsize, purchasing
a replacement home of equal or lesser price. Nearly half are expected
to relocate from the suburbs to more convenient city-living.
Among potential first-time buyers aged 25-24, approximately 35%
own a home, down from 41% at the height of the Millennium Boom.
Although the population of 25-34 year-olds is growing, expect their
rate of homeownership to continue to slip through 2017.
Pair the mass relocation of the Baby Boomers with Gen Y's entry
into the housing market and watch home sales volume grow considerably
in the years 2017-2020. This Great Confluence of seniors and Gen
Y will create a fluid and stable housing market for California.
Data courtesy of the US Census Bureau
two charts above track homeownership by age in the western census
region and California's population of citizens aged 65 and over,
respectively. In combination, these two charts tell us about the
future direction of real estate ownership and sales transactions
among the rapidly growing population of California's senior citizens.
Retirees move real estate
At about the age of 65, most Californians stop working full time
and begin capitalizing on the benefits of social security, Medicare
and their years of saving. The decision to retire is often swiftly
followed by a series of lifestyle changes as retirees take advantage
of their newly-increased liberty and accumulated financial power.
One of the most significant changes is the sale of the retiree's
current home and the corresponding move to a new, more compact and
centralized residence with a better year-round climate or in closer
proximity to family. As California's population continues to age,
senior citizens will exert increasing influence over both the housing
market and every other aspect of the California economy.
Citizens aged 65-75 are more likely to own property than any other
age group, as displayed on the first of the above charts. The accumulated
equity in their homes, combined with their savings from a lifetime's
employment allows them to exert a disproportionately strong influence
upon the statewide housing market. When these citizens begin to
change their spending and living habits in retirement, they create
new opportunities for multiple listing service (MLS) brokers and
agents who market single family residences (SFRs).
The number of people in California aged 65 and older is displayed
on the second of the above charts. This rapidly growing segment
of the population is traditionally made up of the retired and soon-to-be
Over the past twenty years, retirees have exerted minimal influence
in real estate transactions, as the age group of citizens over 65
was comparatively small. The generations born between 1915 and 1935
- during the Great Depression and World War II - did not have the
numbers necessary to remold the housing market in their own image.
That is about to change dramatically, as the above population chart
The massive Baby Boomer generation is defined by the U.S. Census
Bureau as the generation born between 1946 and 1964. As they begin
to retire en masse (a process which has already started) every aspect
of the state's economy will change. The Boomers, the largest single
age group in California, have spent the last 30 years accumulating
their wealth (primarily in the form of stock - not cash) and generally
living in large, suburban SFRs.
Although the 2008 recession wiped out some of their savings and
put a few of these SFRs on the market (or in foreclosure) before
their time, the majority of the Boomers are still on the brink of
retirement. When they do retire, "dis-saving" will be
a collective act. They will liquidate their stocks, sell their current
homes and embark, unfettered, on the next stage of their lives.
The impending wave of retirees has been briefly delayed by the 2008
recession. Many seniors held the majority of their wealth in the
form of paper - stocks - and saw much of it erased overnight when
the stock market crash turned their 401Ks into 101Ks.
However, Boomer retirements were merely postponed. Now that the
stock market has largely rebounded and home prices have rising (however
momentarily), retirees will soon regain their pre-recession confidence
and perhaps some of their spending habits.
The shadow inventory of retiree homes for sale will thus
manifest itself sooner rather than later. Those homes will be key
factors in the elimination of the current rigor mortis in the housing
industry. Retirees generally want to sell and relocate, and most
will buy new SFRs; likely more than 70% will acquire a smaller (though
not necessarily less expensive) residence than the one they have
History repeats itself for Boomer generation
The impending increase in suburban SFR home sales among senior citizens
will keep housing prices in outlying bedroom communities depressed,
limiting the gain Boomers take on a sale. This is a story of supply
and demand economics that their generation knows all too well.
Due to their overwhelming numbers, the Boomers were educated in
temporary grade school and high school buildings. They all hit the
job market within too short of a time period and salaries dropped
accordingly. When Reagan fired all the Federal Aviation Administration
(FAA) tower traffic personnel, he was able to replace them with
equally good and well-educated talent in just a few days.
The Boomers began renting apartments simultaneously in the early
1980s, driving up rents and leading to massive apartment overbuilding,
which took more than a decade for the market to digest. A similar
problem of SFR overbuilding erupted by the end of the 1980s for
the same reasons, and was accompanied by a boom in housing prices
ending with the 1990 recession.
In the late 1990s the Boomers began to invest their accumulating
wealth in the stock market, which generated a stock pricing bubble.
The ensuing collapse of their financial empires wiped out much of
Soon the Boomers will begin to sell off a considerable amount of
the stock they still retain. Such asset reduction will continue
for the next 15 years and kill any movement in the stock market.
Current rises in stocks are the result of mere speculation due to
historically low interest rates in relation to inflation. Billions
of dollars in cash is currently waiting to be invested when the
Historical trends in Boomer conduct will also prove true now as
retirees sell their current homes, looking to find replacement properties
and live freer lives. The first Boomers to retire, those on the
cusp of the population boom, have somewhat higher average earnings
and savings than those who will follow. Consequently, the retirees
of 2008-2017 will have the most money to spend, and will often have
a second or third home to live in or sell.
Those retiring after 2018 will (generally) have somewhat less money,
and thus less purchasing power upon their retirement. Those who
retire later will also have a greater disadvantage due to the competition
from other retirees in their generation. The homes they sell will
fetch lower prices, the urban condos and retirement-community dwellings
will be full before they arrive and prices will be rising.
The price reduction of large suburban SFRs caused by Boomer home
sales will be further aggravated by a corresponding rise in the
values of the more desirable replacement homes in near urban centers.
While we cannot predict with certainty which properties will be
involved or just where they will be, historical and current trends
give us some hints.
Relocation: where will they go?
Homeowners in California do not tend to rent upon retirement, as
shown by the first chart above. In fact, homeownership for those
aged 75 and older remains 17% higher than for any age group under
50. Moreover, the percentage of citizens owning homes over the age
of 75 grew even through the recession, and is currently near its
highest level since 2002.
Homeownership is a well-entrenched habit among the Boomer generation;
a fact not likely to change because of increased age. However, this
does not mean retirees remain stationary.
Sooner or later they decide to move to a new location that has a
better climate or is closer to other family members. With their
collective savings and equity, most will have the resources to do
so with ease.
Retirees have traditionally moved to smaller, more conveniently-located
properties that are closer to urban centers. The U.S. Census Bureau
reported in 2013 that approximately 13% of the population in California's
metropolitan areas is 65 or older.
To complicate Boomer relocation, the younger generation is better
educated and more mobile, migrating with increasing frequency to
the cities. Their parents are likely to follow. They will be attracted
by the increased access to public transportation, the proximity
to cultural and artistic institutions and (not least important)
the closeness of their children and grandchildren.
As more senior citizens retire, interest in condos and other high-density
residences that cater to the urban lifestyle will increase. Ownership
of rental properties, which allow a more flexible and mobile lifestyle,
is more cost-effective than ownership of SFRs and thus will most
likely also see a bump.
The most directly affected housing developments will be those that
cater specifically to the needs of senior citizens. California law
exempts seniors-only housing developments from ordinary restrictions
on age discrimination. As the demand for senior housing increases,
more developers and landlords will take advantage of this exemption.
The range in pricing of high-density (high-rise) housing will also
work to separate the more wealthy (retirees) from the less wealthy
Expansion of existing SFRs to accommodate new relatives-as-tenants
is another phenomenon that will increase. California legislation
has paved the way in this area. In 2003, the legislature required
cities to permit the construction of what are generally referred
to as casitas or granny flats; attached, freestanding or over-the-garage
apartments with no direct access to the main house.
The construction of such a flat transforms a SFR into a two-unit property
within single-family zoning, a first step in California's more efficient
use of land. Casitas are sometimes used by homeowners to gain extra
rental income, but they are most often used initially as a new residence
for elderly relatives or in-laws. Increased living density will thus
be the case not only for cities, but also for suburban areas, which
will reap the benefits of a more close-knit and energy-efficient population
(namely, a better fiber of social, civic and cultural life, and the
development of restaurants, theaters, bars, entertainment and specialty