Housing Out of Balance
The arc of a healthy housing market mirrors the economic life cycle of many consumers. As a first-time homebuyer, you're more likely to need a low to moderately priced starter home. As you progress in your career, saving more money and starting a family, you require a larger home. Eventually, once your children are grown and you retire, you either stay in that home or relocate/downsize to fit a simpler retirement lifestyle.
There are exceptions due to job relocations, divorces, and other unplanned life events, but the general principle still applies. Housing needs change at different points in life, and you strive to meet those needs with the housing choices available to you.
The housing market has been slow to recover from the housing crisis because of a series of market imbalances impeding this natural flow. A new Realtor.com survey found that Baby Boomers are significantly contributing to the imbalance in an interesting way – through inaction. Boomers are overwhelmingly content to stay in their current homes and are not interested in re-entering the housing market.
We're Doing Just Fine, Thanks
According to the Realtor.com survey, 85% of Baby Boomers surveyed do not intend to sell their home over the next 12 months. Only 8% responded that they planned to sell within a year, and the rest were undecided. Of those Boomers not planning to sell, 72% noted that their current home is sufficient for their family's needs. 13% were hesitant to sell for financial security reasons (such as concern about overextending themselves with debt), and 12% cited a need for home improvements.
With home prices generally on the rise – and select markets seeing double-digit increases in home prices over the previous year – content Boomers have little incentive to upgrade. Boomers looking to cash out and downsize, however, face the same issues as younger people looking to move up: high prices and limited inventory.
What's wrong with being satisfied with where you live and wanting to stay there as long as you can? Absolutely nothing. However, from a macroeconomic standpoint, too many satisfied homeowners can create a drag on the housing market by throttling both supply and demand. You can't upgrade until you find a suitable home to purchase and a suitable buyer for your existing home. Content homeowners decrease both the demand of buyers and the supply of available homes.
Millennials Take Another Hit
Millennials constituted 35% of the surveyed homeowners who indicated a plan to sell in the next 12 months, with the primary reason being an upgrade to a larger home or a home with better features. Since Baby Boomers have a high home ownership rate (78% compared to just 41% of millennials), the older group's reluctance to sell limits the inventory of available homes for millennials, and drives up the price for the properties that do exist.
In turn, these millennials can't sell their starter homes to other first-time buyers (also likely to be millennials), causing a ripple effect of poor supply throughout the system. As of June, available homes were down to a 4.3-month supply, well below the normal inventory of six months.
Can't Afford to Build Them, Can't Afford Not To
Why not just build more homes? Housing starts have increased, but they are still well below pre-crisis levels. In addition, construction does not always take place in the greatest area of need.
The supply of starter homes is down 17% over the previous year, as compared to 10% for intermediate-sized homes and 5% for larger homes. High land prices, labor shortages, regulatory constraints, and other costs of doing business make it difficult for developers to make a profit on starter homes. Many of those costs are constant regardless of the size of the home; thus, developers tend to gravitate toward higher-end housing.
Millennials are squeezed in multiple directions. Those who are already homeowners can't sell for lack of upgrade options; thus, millennials who don't own property have few existing options from which to choose. Starter home prices are rising from lack of supply (squeezing out the very people that require starter homes), and new starter homes are hard to come by due to inherent lack of profitability for builders.
Is it any wonder millennials are saying, "Thanks a lot, Mom and Dad. Mind if I take over my old room for a few years?"
In reality, the housing market never attains perfect balance. Even when there is a sufficient supply, ready buyers, and appealing interest rates, individual markets may be suffering from imbalances. It's more important for you to focus on your local housing market.
If you plan on staying put like so many Boomers, that's perfectly fine – but it's still wise to keep tabs on your local housing market. Assuming you are still paying off your home, you may be missing an opportunity to lower your overall costs or monthly payments through refinancing. If your home is paid off, you still may want to sell someday... if the price is right. Appreciation of your home value may make a future offer too good to pass up.
The overriding principle is to be ready to take advantage of whatever comes your way. Know where to look for prospects and how to spot them, and then keep your finances under control so that you can take advantage of opportunities when you find them.
MoneyTips is happy to help you get free refinance quotes from top lenders.