More on the Silver Tsunami

Homes that are walking distance to excellent schools and/or a retail center (with a Starbucks) will probably do fine – even if they need a little work.  Homes out in the boondocks will have more of a struggle.

From the UT:

In a recent column by the Union-Tribune’s Michael Smolens, he discussed the idea of a “silver tsunami” of baby boomers leaving their homes in the coming years. He said this could raise questions about proposals to increase housing production, even imagining an over supply of housing.

Q: Does the “Silver Tsunami” of baby boomer homes mean concerns of a California housing shortage have been overblown?

Bob Rauch, R.A. Rauch & Associates

NO: The concerns are not overblown! The average baby boomer is just over 60 years old and not moving out so quickly. San Diego is not likely to be impacted anytime soon as it was recently ranked No. 8 in the nation for start-ups by Inc. magazine. There is a real need for affordable, detached housing for working adults who are millennials or Generation Z.

Norm Miller, University of San Diego

NO: The exodus of baby boomers from housing in the middle, Florida and northern states will help soften those markets for the next generation, but these markets are already affordable. East coast markets won’t appreciate as fast, but California markets will be immune to such benefits, as Prop 13 keeps many of our residents cemented in place. California tax rates and SALT (state and local tax) limits will have more impact on possible softening of our appreciation rates as negative migration continues.

Jamie Moraga, IntelliSolutions

NO: It may provide some relief to areas of the country where retirees are most concentrated (think Florida or Arizona) or cities where there is a predominant number of older citizens (for example, Pittsburgh or Cleveland). The Silver Tsunami will not be immediate but will be more gradual over a long period of time. While coastal cities in California continue to appeal to potential homeowners of all ages, housing costs should remain a high barrier to entry for the foreseeable future.

Lynn Reaser, Point Loma Nazarene University

NO: While the release of homes by baby boomers may help ease the affordability problem, the process will be gradual. Although some baby boomers may leave the state, most will probably stay. There could be a problem in terms of the mix of housing as some baby boomers downsize and compete for the same smaller housing millennials are seeking. In the short-term, however, builders, not boomers, will be the answer to the state’s housing crisis.

Chris Van Gorder, Scripps Health

NO: The housing shortage in California is real. While there certainly will be many homes up for sale by baby boomers over the next decade, that does not mean the prices will drop nor the supply increase. Most baby boomers will merely be replacing one home for another. So, unless there is a significant decline in the state’s population, the housing shortage will continue. And the shortage will continue to be exacerbated by over-regulation and high taxes — neither of which appears to be going away anytime soon.

Kelly Cunningham, San Diego Institute for Economic Research

NO: There is always significant turnover in housing as residents continuously change homes. The gamut of reasons to change include relocating to better housing, downsizing, moving away or dying. Even as California’s growth dwindles, the population continues to increase. An even larger “tsunami” of the millennial population’s pent-up demand, as well as foreign immigration, will continue to emerge. California’s housing supply still far lags housing demand of an expanding population, although desired optimal home types may vary.

Gary London, London Moeder Advisors

NO: Boomers are not likely to make way for millennials. Many cannot move because the housing shortage presents few alternative choices in San Diego to either downsize or change lifestyles. Many will opt to age in place. The housing shortage is real and affects everyone. In fact, rising home values, which are fueled by the housing shortage, contribute to this inertia, because moving often triggers financial disincentives including capital gains taxes and higher property taxes.

Austin Neudecker, Rev

NO: Retirees selling their homes may help alleviate the housing shortage but far from resolves the problem. We should continue to take action to address the climbing prices rather than rely on unproven predictions. The reported effect will be felt harshest in regions with negative migration. San Diego continues to be a desirable and growing region that must proactively confront housing affordability, homelessness, and cost-of-living increases.

James Hamilton, UC San Diego

NO: Demographics and the number of people wanting homes are ultimately the main driver of house prices. But the aging population is a trend that is going to evolve very slowly. The reality right now is that housing is quite expensive in California generally and in San Diego in particular. I think it is likely to stay that way for some time.

David Ely, San Diego State University

NO: Boomers selling their homes over the next two decades will do little to address the near-term shortage. Given the financial incentives in California for boomers to age in place rather than downsize, it may be years before enough homes are put up for sale to make a dent in the housing shortage. Moreover, the population will continue to grow and young buyers may not even want the types of homes that boomers now own.

Phil Blair, Manpower

NO: My son Trevor and his wife Megan are perfect examples of millennials who are now house hunting in areas of San Diego, while currently loving living in Little Italy. They want a walkable community with good schools for their children. While boomers have historically enjoyed suburban living, they are missing the urban vibes that many young buyers are looking for.

Alan Gin, University of San Diego

NO: The “silver tsunami” will increase the supply of homes in states and regions with large retiree populations. California, in general, and coastal California, in particular, do not fit into that category. More supply will probably be generated by people moving out of the state to retire in less expensive areas. But people who are retiring likely have bigger and more expensive homes that don’t fit the needs of first time home buyers, so that won’t help much either.

Link to Article

Inventory Watch – Decade Wrap-Up

As our real estate market wraps up its strongest decade in history, let’s looks back at the trends.

The government intervened early in the decade by stopping foreclosures and manipulating rates to all-time lows. It resulted in the longest, strongest sellers’ market we’ve ever seen, with no real end in sight. How ridiculous has it become? This week I wrote an offer with the price and terms that the seller demanded, and she countered over the smoke detectors.

Big-time outsiders entered the industry too, hoping to get in on the commission pie. Because none of the industry leaders have been willing to put up an fight, individual agents are left to fend for themselves, and they have resorted to survival gimmicks like short-sale fraud and off-market sales.

Every March we would get a surge of new listings, and the number of choices would grow until August. Lately the inventory has peaked sooner as both buyers and sellers are more antsy about procuring a sale. The most fascinating trend has been how inventory has dwindled with rising prices – in the past when pricing would go up, it would cause more homeowners to sell, but not now:

Each year the best deals sell first, causing a gradual lift in pricing as the summer rolls on and buyers end up paying more later for the leftovers. These are interactive graphs, so you can see the stats for each month by running your cursor over the lines:

What can we expect over the next decade?

Mostly we will be selling old-people homes as the baby boomers phase out. In California there will be less impact as the kids find a way to keep the family estate and preserve the ultra-low property taxes, rather than buy a different home. But it seems inevitable that fewer move-up buyers will bother with the difficulties of moving, and just end up staying put – leaving only the old empty houses to sell.

The first few months of 2020 will be rip-roaring hot, and where that takes us will be very intriguing. If more oldtimers decide that leaving the state is the best/last/only solution, then the market could really take off as the inventory surges with more sort-of-reasonably-priced homes.

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Boomer Liquidations Nationally

This article features our favorite topic today, and they smartly differentiated between areas. I looked up my sales over the last two years and 22% of them involved the last move of the seller (either they had passed away, or close).

Excerpts:

The big question looming in this neighborhood—and dozens of others like it in the Southeast and Rust Belt—is what happens to everything from home prices to the local economy when so many homes post ‘For Sale’ signs around the same time?

The U.S. is at the beginning of a tidal wave of homes hitting the market on the scale of the housing bubble in the mid-2000s. This time it won’t be driven by overbuilding, easy credit or irrational exuberance, but by an inevitable fact of life: the passing of the baby boomer generation.

One in eight owner-occupied homes in the U.S., or roughly nine million residences, are set to hit the market from 2017 through 2027 as the baby boomers start to die in larger numbers, according to an analysis by Issi Romem conducted while he was a senior director of housing and urban economics at Zillow. That is up from roughly 7 million homes in the prior decade.

By 2037, one quarter of the U.S. for-sale housing stock, or roughly 21 million homes will be vacated by seniors. That is more than twice the number of new properties built during a 10-year period that spanned the last housing bubble.

Most of these homes will be concentrated in traditional retirement communities in Arizona and Florida, according to Zillow, or parts of the Rust Belt that have been losing population for decades. A more modest infusion of new housing is expected in pricey coastal neighborhoods of New York or San Francisco where younger Americans are still flocking in large numbers.

On the face of it, this doesn’t sound all bad. Dying homeowners have always needed to be replaced by younger ones and the U.S. has for a number of years suffered from a shortage of housing, a development that has dampened recent home sales activity and kept many millennials stuck in rentals.

But the buyers coming behind the baby boomers, the Gen Xers, are a smaller and more financially precarious generation with different preferences, posing a new kind of test for the housing market.

One problem is that the bulk of the supply won’t necessarily be in places where these new buyers want to live. Gen Xers and the younger millennials have shown thus far they would rather be in cities or suburbs in major metropolitan areas that offer strong Wi-Fi and plenty of shops and restaurants within walking distance—like the Frisco suburbs of Dallas or the Capitol Hill neighborhood of Seattle.

They have little interest in migrating to planned, age-restricted retirement enclaves in sunnier corners of the U.S. lined with golf courses, community centers and man-made lakes—like The Villages, a community of 115,000 in central Florida. Innovations such as voice-recognition technology and ride-share drivers are also making it easier for older people to stay in their existing homes and eschew these retirement communities altogether.

Another challenge is that younger buyers also may not have the financial strength to absorb all of this new supply. New research from Harvard University’s Joint Center for Housing Studies found that households in their preretirement years, age 50 to 64, are less likely to own a home than prior generations, have suffered from stagnant income growth since 2000, and are more debt-burdened, including by student loans.

The consequences of a housing sales glut are potentially wide-reaching. A mismatch between supply and demand in places like Florida, Arizona and Nevada could offer new fiscal challenges that are already familiar to aging cities of the Rust Belt: a shrinking tax base and less money for crucial services like roads and police. Home construction could also falter, dampening an important contributor to the local economy.

“To the extent the local economy is dependent on a vibrant senior population, then it will be more difficult,” said William Frey, a senior fellow in the Metropolitan Policy Program at the Brookings Institution. “Homes will be up for sale and not bought as quickly.”

Housing prices are already stagnating in some places like St. Louis and Youngstown, Ohio as older people die and young people aren’t there to replace them, according to Zillow.

More vulnerable, he said, are small towns and rural areas where young people are less likely to migrate, depressing housing prices indefinitely. “Those are the places that are going to seriously struggle,” he said.

Link to WSJ Article

Have & Havenots

Nearly 80% of those homeowners with a mortgage are spending less than 35% of their income on housing costs?  That sounds like a solid, secure market. Renters should talk to their parents or grandparents about early distribution of their estate:

American homeowners aren’t feeling the pinch from housing costs like they used to — but that’s not necessarily reason to celebrate.

Only 20.9% of homeowners with a mortgage were cost-burdened as of 2018, meaning that they spent at least 35% of their monthly household income on housing costs, according to new data from the U.S. Census Bureau’s American Community Survey. That’s down from 28.8% a decade earlier, just as the financial crisis was reaching its fever point.

And the number of cities where a significant share of homeowners are cost-burdened has dwindled. In 2008, at least 40% of homeowners with a mortgage were burdened across 43 metro areas nationwide. Today, there are no cities where that’s the case.

While homeowners may be less burdened by housing costs, fewer people actually own their homes. Ten years ago, the home-ownership rate was 67.9%, but now it’s 64.8%.

Many of those people who are no longer homeowners have been pushed into the rental market. The country’s rental population has also grown to its largest size ever for as rising home prices and student-loan debt have forced young adults to delay homeownership.

And housing costs remain a major burden for renters, unlike homeowners. The Census Bureau estimated that 40.6% of renters spent 35% or more of their monthly household income on rent and utility bills in 2018. That’s roughly the same share of people as in 2008 (40.8%), but represents more people due to the growth of the country’s rental population.

Households that are forced to pay so much on rent have a harder time saving money to put towards the down payment for a home purchase, making it more difficult to make the transition from renter to homeowner.

Link to Article

“Frozen in Place”

We are moving less – is it because we won’t, or can’t?

WASHINGTON — Americans are moving at the lowest rate since the government started keeping track, according to Census Bureau data released on Wednesday, as deep changes in the economy and the housing market increasingly freeze Americans in place.

The United States has long been one of the most mobile countries in the developed world. In the 1950s, about one-fifth of the American population moved each year. When factories would close, workers would move to other parts of the country to find jobs in new ones. Young people flocked to cities and rapidly growing suburbs, where jobs were plentiful and rent was cheap.

“In 1957 you could move to a flophouse in New York just to try it out for a while,” said Tyler Cowen, a professor of economics at George Mason University and author of “The Complacent Class: The Self-Defeating Quest for the American Dream.” “That doesn’t exist any more.”

These days, rents in many larger cities have exploded, making it much harder for a young person seeking better opportunities to afford to move. And low-wage jobs, after adjusting for the local cost of living, pay about the same everywhere.

The result is a nation where people move far less than they used to: Just 9.8 percent of Americans moved in the year ending in March, according to the newly released data. That was the smallest share since the Census Bureau started tracking it in 1947, and the first time it had fallen below 10 percent, said William Frey, senior demographer at the Brookings Institution.

“I keep thinking, ‘This is the year we’ll see a bit of an uptick,’ and it just doesn’t happen,” Mr. Frey said. He noted that the share of Americans who move each year now is about half of what it was in the 1950s.

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Liquidation Event Or Soft Landing?

Ty said yesterday,

The thing I think you miss most or maybe overlook is how overleveraged the average person is. I do commercial real estate and routinely have access to small business owners financials. Equity rich in their homes but cash poor with credit card debt and car loans up the wazoo. Any bump in the road will send them into disarray. Selling the house may be the only way they can survive. I think rocky times ahead.

We can speculate about what might be or what could happen, but in the end we’re all just guessing.  Blog reader ‘Another Investor’ believes the opposite – that boomers are flush and not moving until they go feet first…..so we have balance here at bubbleinfo.com!

Let’s use statistics to help guide us.

If there were trouble brewing, then more people would be trying to sell.

Not everyone would sell, because their motivation might not be strong enough to take what the market would bear.  So let’s just consider the number of listings – and also consider that there are probably more re-lists now than ever:

NSDCC Total Number of Listings Between Jan-Oct:

Year
# of Listings
2014
4,278
2015
4,583
2016
4,698
2017
4,248
2018
4,389
2019
4,327

Boomers or others aren’t trying to sell any more than they used to – so no obvious surge yet.

But the number of cash-out refinances was somewhat alarming yesterday.  But everyone has to qualify for those mortgages, so even if more people are tapping their equity, they must be able to afford it.

But like Eddie89 said, the rules have changed, so all previous assumptions don’t apply.

I think any distressed homeowners will wait until the very end before deciding to sell because they really don’t want to move.  It will drag out the inevitable, but it might just cause a softer landing because each homeowners ability to last longer will vary.

Let’s keep an eye on the number of new listings – that’s where you’ll see it first!

Seniors Not Giving Them Up!

First-base side near Padres dugout

I went to the annual seat shuffle at Petco Park on Tuesday.  It’s the event where Padres season-ticket holders can see which seats have become available, and possibly switch to a better location.

It reminded me of our local real estate market:

The best locations are owned by seniors who have had them for a long time, and they’re not giving them up!

There were some decent seats available, but very few of the prime seats up close.

Old-timers discussing their future mirrored what I hear about their real estate too.  Some have a specific succession plan where, upon their death, the kids will take over the tickets, but there were others who mentioned that their kids are out-of-town, and have no interest.

Will there be a time when a load of great tickets become available?

Just like we’ve seen in real estate, probably not.

But you don’t need every senior to bail – all you need is one old couple to give up their prime spot!

Visitor’s clubhouse

Here’s a 33-second look at how few of the good seats were available:

NSDCC End of Selling Season

I was talking to Nick yesterday about the current market conditions, and how home sale have been affected by the low mortgage rates recently.

You can see in the graph above that over the last five years we’ve been accustomed to rates in the threes, so it seemed obvious that when rates almost hit 5% that a market slowdown was in order.

Likewise, wouldn’t sales pick up as rates came back down?

But interestingly, in another statistical quirk, sales this year are the same as last year:

NSDCC Detached-Home Sales, August 15th – October 15th

Year
# of Sales
Avg $$/sf
Median SP
Median DOM
Sept 30yr Rate
2016
579
$517/sf
$1,199,000
28
3.46%
2017
528
$542/sf
$1,225,000
26
3.81%
2018
484
$570/sf
$1,330,000
26
4.63%
2019
484
$604/sf
$1,387,500
27
3.61%

Last year when sales were plunging 8% (again), it was easy to blame it on the higher rates. But as rates settled down this year, the best we can say is that sales have flattened out.

Reasons:

  1. Higher pricing is offsetting the lower rates.
  2. Buyers expect rates in the threes. Rates would have to get into the 2s to create a surge now.
  3. Not many homes for sale provide a compelling value to buyers (either the house or price is wrong).

The lower rates this year have provided that mythical soft landing that no one thought was possible. It is giving sellers and agents a sense of security that higher prices are supportable. But wouldn’t rates have to keep going down further for prices to go any higher?

If rates and pricing stayed about the same, the market should plateau along.

But can sellers resist adding that extra 5% on top of the last sale comp?  Probably not.

We’ll need an Election Year Miracle for prices to keep rising in 2020!

Helping Children Buy A Home

Let’s also note that mortgage guidelines allow for parents to contribute the entire 20% down payment. Hat tip to SM for sending in this article on the Bank of Mom & Dad! 

Buying a home is increasingly a multigenerational family affair. Four in 10 parents recently surveyed said they expect to help their children buy a home. That’s more than double the percentage of parents who themselves got help from their parents when they bought their first home.

Home prices that have been rising faster than wages, combined with burdensome levels of student debt, are fueling this trend. Moreover, helping with home ownership is a here-and-now assist that can transform a child’s financial life, rather than waiting to bequeath money down the line.

Whether you are the Bank of Mom and Dad or the adult child eager to buy, a successful intra-family deal requires careful consideration of the various options:

Can you afford it? OK, parents, it is hereby stipulated that you, of course, want to help. Now the hard question: Can you cope with the long-term ramifications?

A $10,000 gift you make at age 65 would be worth more than $26,000 at age 85 if it kept growing at a 5% annualized rate. A $50,000 housing stake today would be worth more than $130,000 at age 85. If you have any inkling you could use that extra cushion in retirement, you probably shouldn’t be gifting money today. You could consider making it a loan – more on this below – but also keep in mind that if you intend to pull the money out of a traditional 401(k) or IRA, you not only will owe taxes, but a large withdrawal could bump you into a higher tax bracket for the year.

Got a boomeranger at home? Help them save for a down payment. According to the Pew Research Center, about 15% of today’s millennials are living at home, nearly double the rate when their parents were in their 20s and 30s. Making it a financial free ride does nothing to help your child build adulting muscles. If they’re focused on paying off student loans, great. But if they have ample cash flow and want to eventually buy a home, now’s the time they should start to save. You should insist that they set up a separate savings account and have automatic monthly deposits zapped into it from their checking account. A $500 monthly contribution is a down payment fund of more than $6,000 in just one year. That can be more than enough to qualify for a low down payment mortgage in many regions of the U.S.

Link to Full Article

Taxation on Inherited Property

When you drive around older neighborhoods, you see homes in original condition or in a state of disrepair, which are signs of senior homeowners. It makes you think, “They should sell and move – are they just waiting around to die?”

The answer is YES, and it’s because of how the IRS taxes the gain from the sale of your home. Once a property is inherited, the tax basis is stepped up to fair-market value.

Excerpted from the IRS website:

Inherited Property

The basis of property inherited from a decedent is generally one of the following.

  • The FMV of the property at the date of the individual’s death.
  • The FMV on the alternate valuation date if the personal representative for the estate chooses to use alternate valuation. For information on the alternate valuation date, see the Instructions for Form 706.
  • The value under the special-use valuation method for real property used in farming or a closely held business if chosen for estate tax purposes. This method is discussed later.
  • The decedent’s adjusted basis in land to the extent of the value excluded from the decedent’s taxable estate as a qualified conservation easement. For information on a qualified conservation easement, see the Instructions for Form 706.

If a federal estate tax return doesn’t have to be filed, your basis in the inherited property is its appraised value at the date of death for state inheritance or transmission taxes.

For more information, see the Instructions for Form 706.

Appreciated property.

The above rule doesn’t apply to appreciated property you receive from a decedent if you or your spouse originally gave the property to the decedent within 1 year before the decedent’s death. Your basis in this property is the same as the decedent’s adjusted basis in the property immediately before his or her death, rather than its FMV. Appreciated property is any property whose FMV on the day it was given to the decedent is more than its adjusted basis.

Community Property

In community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin), married individuals are each usually considered to own half the community property. When either spouse dies, the total value of the community property, even the part belonging to the surviving spouse, generally becomes the basis of the entire property. For this rule to apply, at least half the value of the community property interest must be includible in the decedent’s gross estate, whether or not the estate must file a return.

For example, you and your spouse owned community property that had a basis of $80,000. When your spouse died, half the FMV of the community interest was includible in your spouse’s estate. The FMV of the community interest was $100,000. The basis of your half of the property after the death of your spouse is $50,000 (half of the $100,000 FMV). The basis of the other half to your spouse’s heirs is also $50,000.

For more information on community property, see Pub. 555, Community Property.

https://www.irs.gov/publications/p551

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