The older generation stays in the labor force (and in their homes)
Though many prime-age workers are leaving the labor force, older workers are staying at work longer. In the 1980s and 1990s, the prevailing wisdom held that around the age of 65, most California workers could capitalize on the benefits of social security and years of retirement saving to stop working. As a reflection of this, the LFP rate of workers 55 and over fell continually from the 1950s through the 1990s.
However, due to the pernicious combined loss of asset wealth and retirement savings wrought by the stock market crash and the Great Recession beginning December 2007, retirement will be postponed for many Californians. Baby Boomers, defined by the US Census Bureau (the Bureau) as the generation born between 1946 and 1964, will be required to stay in the labor force longer in order to acquire enough funds to finance their retirement. And as a direct consequence of keeping their jobs longer, Boomers will also be keeping their homes in suburbia longer to stay near their places of employment.
For perspective, the population of retiring California Boomers is massive (and growing). [See chart below tracking California’s population of citizens aged 65.]
Additionally, many Boomers who intend to retire at 65 and relocate will find that, due to the beleaguered housing market, they won’t be able to get as much from their property (to some, their principal nest egg for retirement) as they need to sustain them through their retirement years.
While Boomers are continuing to work out of necessity and retain their homes until they build up a suitable level of equity, they will be unable to sell their homes in suburbia to move to their area of choice (likely closer to their grandchildren, into a retirement community or a condo or apartment in an urban center). Instead, they will be shackled to suburbia until retirement. [For further commentary on the role of retirees in the future of California real estate activity, see the July 2010 first tuesday article, Boomers retire and California trembles.]
Similarly, a recent report by Employment Benefit Research Institute (EBRI) reveals that the national rate of retirement saving is declining, no doubt prompted by the current tightened financial circumstances. Analyzing data recently released by the Bureau, the EBRI found that just over half (54.4%) of full-time and salary workers age 21 to 64 participated in a retirement plan in 2009, down from 60.4% ten years ago. When all labor force participants are taken into consideration, only 40% are saving for retirement.
Thus, not only has the value of asset wealth – homes – intended for liquidation on retirement eroded, but a majority of individuals have stopped replenishing their decimated retirement reserves. For many Californians, retirement simply will not be an option until well beyond age 63. And the first demographic to feel the sting of a delayed retirement will be the Boomers who are continuing to trudge to work despite their advancing age.
Where will Boomers spend their golden years?
Just because Boomers will be retiring later than previously anticipated doesn’t mean they won’t be able to retire at all. Once Boomers do eventually save enough money and their investments produce an acceptable yield to afford them a comfortable retirement (read: interest rates rise), they will take their first tentative steps into what is commonly referred to as their golden years.
One of the most significant lifestyle changes that occurs in retirement is the sale of the retiree’s current home and the corresponding move to a new, more compact and most likely centralized residence. Thus, once they do eventually retire, the Boomers will either:
- stay where they are in suburbia due to their civic involvement in the community and their close proximity to long-time friends (the Bureau reports that 50% of senior citizens who relocate choose to move to a new residence within the same community);
- relocate closer to their family (children and grandchildren), likely out of the suburbs and into an urban environment closer to employment centers; or
- buy an urban condo in a cultural center or move into a retirement community in a temperate environment.
Traditionally, 65 is the age of the “great sell-off.” However, in California, most of these 65+ year olds are buying again. Many will be acquiring condos in urban areas. The advantages of urban living are many. In addition to being near areas of cultural interest in the city and increased access to public transportation, most condos come with amenities, such as community pools, workout facilities and much common space.
Condo projects in higher density urban locations typically provide a high level of personal security. This allows for condo owners to spend time traveling without concern for the contents of their unit. Urban condos also require very little maintenance and no yard work by the owner, as is required by a detached single family residence (SFR). Little wonder then that the Bureau reports three out of four citizens aged over 62 lived in metropolitan areas in the year 2000 – a trend that has likely increased in the last ten years.
When these citizens begin to change their spending and living habits in retirement, they will create new opportunities for multiple listing service (MLS) brokers and agents who market SFRs. These Boomers will influence real estate sales volume (and prices) both in the suburbs, which half will leave, and the urban market many of them will relocate to from 2016 to 2035, peaking in influence around 2025.
The battle royal circa 2020: first-time buyers and retirees fight for urban living space
Sometime in or around 2020, a real estate bottle-neck will occur known as the Great Confluence. As part of the Great Confluence, two demographic groups will simultaneously, and in disproportion to the past, desire living space in the urban cores of California. By 2020, Generation Y will have completed college and entered the high-skilled labor force, eventually becoming financially capable of purchasing a property in the pursuit of obtaining a standard of living higher than their parents. In the opposing corner, by 2020, the Boomers will have worked those extra years necessary to be able to finally retire, some five to ten years later than planned in the ‘80s and ‘90s. [For more information on the development of Generation Y and their delayed entry into the real estate market, see Part I of this article series.]
These demand events for housing will occur at approximately the same time, prompting both demographic groups to migrate in large numbers to the cities simultaneously – father and son will compete for space to live in the same real estate market at the same time.
Thus, agents and brokers need to anticipate this massive demographic shift into urban areas, specifically multiple-housing projects with security and relatively high prestige. Mark your calendars: starting 2016 to 2018, Generation Y and the Boomers will start to leave the long commutes, chaparral and property maintenance of suburbia behind. We are all headed to town.
With a little help from the state
With Generation Y and retirees flooding to urban areas all at once, what assistance can be provided by local and state governments to ensure housing is available to all arrivals from these two demographic groups?
The answer lies in the high-rise building. High-rise buildings allow for large amounts of people to live in the smallest amount of space. Consequently, traveling time is reduced from an individual’s residence to his job, services, shopping, schools and places of socializing — in fact, public transportation will finally be used to its fullest potential again. To help conceptualize these benefits, think of energy efficiency (home ratings), carbon emissions (gas engines) and the time freed (not parked on the freeway) to do other things. [For more information on the merits of urban living, see the May 2010 first tuesday article, The plight of California to be solve by…cities?]
Editor’s note – A point of clarification is needed: the occupant’s living quarters need not be small, but rather the size of the plot of land needed to house many individuals is hugely reduced.
High-rise buildings serve a dual purpose: they house a large quantity of people in a relatively small geographic area, and they also invite a surge of employers to take advantage of a centralized workforce. However, the future of high-rise buildings is threatened by height restrictions imposed by myopic local governments. These height restrictions are the antithesis of forward-looking public policy as they put an intentional cap on growth of all types. It is a known fact that nothing can grow to its fullest potential if it is caged. Height restrictions limit the number of people who can live within a given area, in the process limiting the ability of a state’s population to appreciate a desirable location, and in many ways, greatly hindering growth of the tax base that feeds a municipality’s coffers, and in turn, the community’s culture.
California’s legislature needs to be urged to intervene to remove these cumbersome and counter-productive local height restrictions, especially along metro-line tracks. Greater height for buildings of all types should start in the financial, governmental and professional districts in the heart of the city and then move out in concentric circles, letting the city skyline grow organically from the core outward. With proper local planning, increased height limits provide more and generally better housing for the population rush perched to descend upon the cities, and create more real estate transactions in which agents and brokers will participate.
Future glory to be had by (the remaining) agents and brokers
Though the real estate forecast for the next two to three years remains bleak as California continues to dispose of its growing phantom inventory of homes brought on by increasing delinquent mortgages that will have to be foreclosed on and resold, a sliver-lining is emerging on the ominous cloudbank gathered over the state. And the reason for future optimism is competition.
Roughly 50% of all real estate agents licensed at the peak licensing period in late 2007 have left or will leave the real estate profession by letting their licenses expire unrenewed. One third of those who renew their sales agent licenses will not be employed by a broker; thus, they will not be involved in real estate transactions as agents. Accordingly, less than one third of the 99,700 individuals who received their licenses in 2006 and 2007 will be actively participating as agents in real estate transactions in 2011 and 2012, as the California real estate market begins to find its bottom and stabilize for an upturn in sales volume to mark the beginning of our real estate recovery, probably in 2013. Similarly, only about 70% of brokers will likely renew their license upon its expiration. [For more information on the California real estate licensee population, see the November 2010 first tuesday article, Newly licensed sales and broker population.]
But for how long will this contraction in agent population continue? Long enough for the hit-and-run real estate charlatans who got a license during the Millennium Boom under the auspices of “easy money” to become extinct. Thus, the recession will work its magic, clearing out the inefficient agents who crowded the market and siphoned fees from well-seasoned, professional agents. Thus, the recession will reinstate efficiency to real estate transactions once again, a case of fewer being more.
Thus, agents in for the long haul who position themselves in the right location to benefit from the buying and selling habits of the future demographic trends will be rewarded handsomely. Every month they’ll encounter less and less competition as increasing numbers of agents and brokers leave the real estate profession and let their licenses lapse. At some crucial threshold during the real estate recovery, the volume of real estate activity will become sufficient to comfortably support the remaining agents. The equation is simple: more public per agent = greater fees for each licensed agent.
The future appears bright as these demographic movements finally take effect and we again find ourselves in a virtuous cycle of increasing real estate transactions. To participate, prudent and high-functioning agents and brokers need to understand that past trends in all types of real estate activity have come to a halt, and that trends for the newly developing paradigm in real estate services will differ from the recent past, and do so dramatically.