This article series examines the effect California’s shifting age demographic has on future real estate trends, and provides insight as to how agents will benefit by anticipating the services needed to support the emerging real estate market patterns.

 

Part I of the series focuses on the innate potential of Generation Y to single-handedly invigorate the real estate market this decade.

 

The magic worked by recessions, and agents

 

The Great Recession, like all other recessions that came before it, is akin to hitting an economic reset button. Trends in the real estate market, ownership behavior and financial concepts that crystallized during the cash-flush years of the Millennium Boom, such as the belief in ever-increasing asset values, the infatuation with the suburban lifestyle, the arrogance of “as is” type disclosures and the listing agent smugness about seller dominance, ceased completely. In its wake, new market trends have taken root, sprouting in widely different directions like the arms of a newborn starfish to grow with the market realities of the post-Boom era.

California’s real estate market is now poised to spring back to life again as it always has and it always will due to its cyclical nature and the youthfulness of its population. But what direction will the regenerated real estate market take after short sales and real estate owned (REO) resales which now dominate are fully purged? What geographic regions and segment of the California population will carry the action and be profitable for the industry gatekeepers in the coming years? What part of the real estate market will not survive the demographic shift and become rightfully extinct having been found lacking when the economic tide went out?

California agents and brokers – our licensed and entrusted gatekeepers – will not likely bank a fortune in the next two to three years, but many will get positioned to acquire great wealth by the end of this decade. In these lean times of hugely reduced real estate sales activity with properties moving at half their 2005 prices, most agents who remain active full-time will only generate an income sufficient to support their minimal subsistence, nothing more. A collective decline of roughly 75% in personal income for California’s real estate licensees handling sales since the Boom years of 2004-2005 comes as a devastating financial blow to most. Property management has fared much better, especially residential.

However, forward-looking brokers and agents are planning for their future income. They are taking the time now to acquire the specialization needed to build their reputation and expertise in segments of the real estate market that are beginning to expand (while others are or will be contracting). Rebranded as stand-alone experts, they will be in an ideal position to profit when the market definitively rebounds.

The pace and quantity of new jobs will dictate the future volume of real estate sales and leasing since income is necessary to purchase and carry (or rent) a property, to house employees and inventory or family. Thus, the future of real estate can be in part divined by:

  • looking into employment trends – jobs going forward; and
  • labor force participation (LFP) rates, the percentage of the population currently employed or actively seeking employment.

 

Jobs drive real estate transactions, but demographics drive job creation.

Like peering into a crystal ball, a critical study of LFP rates predicts the future movement of the California real estate market. However, fundamental to understanding and predicting LFP rates, some knowledge of California’s age demographic is necessary. Simply put, while jobs drive real estate transactions, demographics drive job creation and LFP rates – as well as real estate sales and rental occupancy.

For example, a low LFP rate among this decade’s 25-34 year olds, known as Generation Y to identify those born in the ’80s and ’90s, indicates this segment of the population will enter the real estate market as first-time buyers later than prior generations. Generation Y, also called the Millennials, the Net Generation and Gen-Y, is taking more time to accumulate the wealth (down payment) necessary to purchase a home.

At the other end of the generational spectrum, a high LFP rate presently being experienced among the generation aged 55 and above indicates this older generation, while growing fast in numbers, will work longer before they retire. Thus, they will likely delay the sale of their current home (most purchased in the 1985 to 1991 period) and their relocation to beyond this decade.

LFP rates by demographic is the focus of Labor Force Participation and the Future Path of Unemployment, a recently published Economic Letter by Joyce Kwok et. al. of the San Francisco Federal Reserve. Though the study deals exclusively with employment and demographic trends, first tuesday extrapolates this data and interprets what it means for California real estate agents, supplemented by data just released by the United States Census Bureau (the Bureau).

 

Peculiar rearing of Generation Y postpones home buying

The sheer number and future buying power of Generation Y will hearken a sea-change in the stalled California real estate market. Generation Y is on the cusp of influencing our world of real estate sales, rentals and construction by flooding into the real estate market in large numbers. In the process, they will sop up the excess inventory of single family residences (SFRs) and apartments that presently plague the state in the wake of the Millennium Boom.

 

However, this mighty Gen-Y demographic, the future savior of California real estate, is burdened by current anomalous economic  conditions which are interfering with their ability to find suitable employment. In turn, employment conditions are affecting their financial ability to purchase a home as early in life as has been the trend for past generations.

Generation Y: the nomadic demographic

 

Generation Y is taking longer to settle down and is remaining transitory, both economically and physically, longer than prior generations. 33% of 20 year olds now migrate to a different rental property every year, while 40% move back in with their parents at least once over the course of their early lives, according to 2009 data released the Bureau. Generation Y is also professionally untethered: the average person in Generation Y goes through seven jobs before they reach the age of 30 – the median age for first-time homebuyers.

Employment, more specifically existing jobs, is the first and most integral step toward real estate acquisition by younger age groups. To purchase a property at age 25-34, the typical age of a first-time buyer, individuals in Generation Y need to borrow against the future income they will receive. This is a good thing since they benefit from a higher standard of living paid for with future earnings which will grow and allow an even higher standard of living in the future.

However, the Great Recession has profoundly stifled the financial development of Generation Y, permanently stunting the financial well-being of those who have already completed college and delaying their entry into the real estate market.

Many members of Generation Y cannot find any form of employment upon graduating high school or college.

According to data released by the Bureau, lower-skilled adults aged 18 to 34 experienced the most pronounced increase in poverty in 2009 versus other age groups. This age group is primarily composed of the Generation Y children of the Baby Boomers. Many members of Generation Y cannot find any form of employment upon graduating high school or college. Most find it harder yet to get a job in the pre-selected field of study they pursued in academia. Thus, most Generation Ys settle for a job in a different discipline, professionally stigmatizing them for later entry into their industry of choice; at best, delaying the age at which they will  attain pay levels consistent with their desired standard of living – housing.

Additionally, due to the lack of long-term professional experience among Generation Y, many shell-shocked employers are spooked by the recessionary cycle and retain and hire only older workers since they have already proven themselves proficient at the jobs available – known quantities.

Without an income flow from employment to develop savings, Generation Y has no immediate access to funds for a down payment on their first home, let alone the financial resources necessary to service the continuing costs of ownership. Similarly, without a job, the inverted debt-to-income (DTI) ratio of Generation Y will render them ineligible for purchase-assist financing, a condition referred to as financial atrophy. This diminished economic standing (from levels they enjoyed as a student) has temporarily reduced the demand for housing. Many unemployed members of Generation Y have been forced to move back in with their parents in the suburbs, or to cohabitate with friends or romantic partners.

What does this mean to California agents and brokers? Simply, the future is bright, but you’ll need to be patient until Generation Y is in an economic position to enter the fray. In the meantime, become an active part of this coming trend by educating and positioning yourself now through experience so you can handsomely profit when Generation Y finally swoops in and resuscitates the ailing real estate market. Collectively, they will suddenly get it and understand that homeownership is a socially, if not financially, advantageous thing to do. Once this synchronized realization takes place among them, the rush will be on just as it was with their parents in the late ’80s.