Every day across the nation 10,000 Baby Boomers reach the age of 65, according to the Pew Research Center. This is the largest generation in the history of the U.S., and their combined movements have shaped our economy over the past half-century — including the housing market.
Here in California, about 12% of our population is 65 or older in 2016, amounting to 5.2 million individuals. Further, this number is growing every day, meaning a transformation for the workforce and the communities Boomers reside in across the state.
Most Californians start to think about retirement beginning in their late-50s and early-60s, and given that the average Baby Boomer is 61 in 2016, retirement is certainly on the minds of many Californians, including many of your real estate clients.
When (and where) they will buy
Currently, 76% of Californians aged 65 and over are homeowners, far above the average 53% homeownership rate in California. The high homeownership rate for retirees is not solely due to the financial stability reached over a lifetime — homeownership is an intrinsic part of the American Dream to this generation, one not likely to be given up in retirement.
Therefore, while many will sell their home in order to downsize or move to a nicer climate when they retire, the majority won’t rent – they’ll buy again. The question for real estate agents is: when and where will these homes be purchased?
Soon-to-be retirees will find it easier to gain mortgage approval while they’re still employed—a fact most seasoned homeowners (of which most Baby Boomers are) know. Therefore, for those planning to remain in their communities post-retirement, the time to downsize is swiftly approaching. Zillow highlights the benefits of choosing to buy while still employed, here.
But there is a caveat to Zillow’s logic — many Baby Boomers own their home free and clear. Therefore, when they sell their current home they won’t need to take out a mortgage for their new purchase, especially for those downsizing and spending less on their future home than their current home’s value. Those who don’t need to qualify may well wait until after they retire to buy.
Further, many retiring Boomers will relocate to other cities or states upon retirement, to be closer to grandchildren or to be in more walkable, warm climates. In general, these locations are out of their traditional suburban neighborhoods, near the coastal urban centers where their Generation Y (Gen Y) children reside.
Another reason for retirees to wait to make their next home purchase is to ensure they don’t get in over their head on housing payments. Since income decreases for most individuals after retirement, a retiree’s debt-to-income (DTI) ratio increases, making qualifying for a mortgage (if needed) more difficult. And no retiree wants to find themselves under-prepared to make their housing payment in retirement. When this happens, retirement is delayed or part-time work is taken on indefinitely to help support their over-optimistic home purchase.
Alternatively, Boomers approaching retirement age can sit down with their financial planner (a good idea in any case) and figure out what their monthly income will be once they quit work. Using this figure, they can buy their retirement home with their future DTI in mind, even though the lender may qualify them for a higher DTI today.
This generation was also the hardest hit by the 2008 Great Recession. 60% of Baby Boomers say their finances deteriorated due to the recession. Following the recession-induced drop in Boomers’ assets — including stocks, retirement accounts, home values, and the loss of jobs and consequential depletion of savings — 60% say they will need to delay retirement to make ends meet, according to Pew Research Center.
This means the coming retirement boom is coming later than expected, likely to begin at the end of this decade, peaking in 2020-2025 when most Boomers are in their late 60s. In the meantime, expect to begin to see more movement in the home sales market starting in 2019. By this time, California will have reached a full jobs recovery and Gen Y will finally be prepared to take on the responsibilities of homeownership. Boomer retirements will amp up and sales volume will increase on both sides of the generational shift, with Gen Y purchasing starter homes and Boomers shifting their sight from their suburban McMansions to urban condominiums.