Underinvestment in Real Estate Might Be the Next Big Hurdle for Investors, According to a New Report

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There may be a real estate underinvestment crisis looming in the coming decades, thanks to baby boomers. 

According to a joint study from Morning Consult and home improvement company Leaf Home, 55% of baby boomers plan to age in their 40-year-old-plus homes and have no intention of selling or renovating.

That means when millennials inherit homes, they may be faced with a mountain of deferred maintenance that may prove costly and lead to a potential construction and supply crunch. Meanwhile, empty nesters own twice as many large homes as millennials with kids, contributing to the housing supply crunch across the U.S.

Jon Bostock, CEO of Leaf Home, said in a press release:

“The housing market is caught in a generational tug-of-war. Boomers will soon face aging-in-place hurdles, while millennials will face the surprise of homes in need of major upgrades. With an aging and ignored inventory of homes available in the next decade, we may see a crisis that will overwhelm the home improvement industry and strain the budgets of inheriting millennials, impacting the housing market.”

What the Study Says 

The study found that many baby boomers live in houses dating from the 1980s or earlier. More than half of the respondents said they live in homes that are over 30 years old, with many saying they’ve never done any major renovations, nor do they have any intention of doing so. 

Even more concerning is that only 24% are preparing their homes for aging, with even fewer adding safety features.

At the same time, around 81% of baby boomers plan to leave their estates to their millennial children when they pass away, with more than half expecting to leave $500,000 or less. 

All this means millennials could be set to inherit older homes in dire need of renovation.

Meanwhile, many millennials with kids are being priced out of larger homes (three-bedroom-plus), with 20% of the country’s large homes being owned by empty-nester baby boomers, according to real estate firm Redfin. This generational divide has changed over the past decade, with more older Americans owning larger homes than they did in 2012.

The percentage varies across the U.S., with baby boomers taking up large homes in major metro areas in the Rust Belt and South, including: 

• Pittsburgh at 32.1%
• Birmingham, Alabama, at 31.1%
• Cleveland at 30.8%
• Buffalo, New York, at 30.5%

Many baby boomers don’t have mortgages, which means they have no incentive to sell. Around 54% of baby boomers who own homes are mortgage-free, which means the median monthly cost of owning a home (between insurance and taxes) is just $612, according to Redfin. And for those who do have a mortgage, many have lower interest rates compared to those being offered now. 

What This Means for Investors 

There’s a massive housing supply shortage in the U.S. The latest estimates from 2020 found a housing supply deficit of 3.8 million units. While some areas are trying to address the housing gap by building more multifamily housing, high housing prices and the increased costs of financing over the last few years have made it difficult for the average American to afford to buy.

And with baby boomers staying put, the housing supply gap might not diminish anytime soon, Redfin senior economist Sheharyar Bokhari said in a press release.

“There’s unlikely to be a flood of large homes hitting the market anytime soon,” Bokhari added. “Boomers don’t have much motivation to sell, financially or otherwise. They typically have low housing costs, and the bulk of boomers are only in their 60s, still young enough that they can take care of themselves and their home without help.”

This means that for real estate investors, fewer homes are likely to be on the market in the coming decades. But when these homes do go on the market, they’ll be in sore need of upgrades. And for savvy investors, there may be opportunities to buy fixer-uppers for a bargain before fixing them up and selling them for a profit. 

But for the time being, it seems the housing scarcity will continue. “Some boomers are ready to downsize into a condo or move somewhere new for retirement, and the mortgage rate lock-in effect is starting to ease—so even though there won’t be a flood of inventory, there will be a trickle,” said Bokhari.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.