Generational Effect On The Housing Market

Baby boomers have been the backbone of the US economy for decades now. As they continue to enter retirement age we are forced to consider the effect this will have on the housing market. When baby boomers retire they will have to downsize due to the lack of retirement savings. Raoul Paul from Real Vision breaks down the median baby boomers net worth that totals $182,000.

When people retire it is common for them to invest in fixed income assets like government bonds. The 10yr treasury is yielding under 2%, which means a baby boomer can expect to receive somewhere around $3,640 a year if their whole net worth was in 10 yr government bonds. As you can see from the chart below overall inflation from 1997-2017 was 55.6%. However, if we dive deeper into the chart we can see some categories that have little to no effect on baby boomers, like college tuition or childcare. The elephant in the room is the rising cost of hospital services and healthcare.

Baby boomers are going to have to downsize, causing an oversupply in the housing market. The millennials are the only generation that compares to the size of the baby boomers, however, they lack the capital to purchase the homes at the current asking price. This will add to the supply and demand issues that are already apparent.

Even though millennials are making more than the previous generations, $47,034 a year on average according to the US census bureau. They lack the savings to pick up this demand that will be unleashed from the baby boomers. About 58% of millennials have less than $5,000 in savings and 43% of millennials have student loan debt. With millennials making more and delaying the purchase of their first home, we would be led to believe that they would be able to afford homes at today's asking price. However, this is not the case.

One of the main reasons millennials are lacking capital is inflation on tuition and inflation on everyday goods. Millennials also have trouble saving because rents have been increasing with home prices.

The age millennials are having their first kid is up to 29.9 years old. This could be a reason why millennials are slow to purchase their first home. Apartment List did a study of 6400 millennials and found that about 90% of them want to buy a home but they can’t afford it. Some say millennials will have an easier time buying homes because the interest rate is the lowest in recent history. If this was the only factor, then it would be easier. However, with high credit card debt and rates, coupled with student loan debt, millennials can’t afford to make a down payment to begin with.

According to the consumer credit reporting agency, Experian, the average millennial has $4,712 in credit card debt. That's almost the amount they have in savings. The average credit card interest rate is 19.02%. The graduating class of 2018 has an average student loan debt of $29,800 with 5% interest. With student loans, credit card, and rising inflation, millennials begin the homeowner journey at a disadvantage and fall into a cycle of long term renting.

In conclusion, I believe the housing market is going to have a few tough years ahead. As the baby boomers continue to retire they will be forced to sell because they need the money for retirement and millennials don't have the capital to purchase the homes at today's asking price.