The Market is in a Giant Bubble: Part 2

All hail the Baby Boomers! No other generation has been able to amass such wealth in the history of America. Heck, if we all had their ability to capitalize on economic opportunities, we’d be riding in Rolls Royce tweeting “LOL less than 1 mil” at people’s stories about successful flips on BiggerPockets. You see, the Baby Boomers have successfully leveraged politics, pop culture, and their sheer numbers to get the best deal any generation ever has from the economy, specifically the housing sector.

The conversation about Baby Boomers begins with their sheer size. Take a good look at the graphics above. If you look at the first graphic, you can see the United States population split by age is driven by two bulges, the older bulge being the Baby Boomers, and the younger bulge being the millennials. Rewind to 1990 and 1980, and the impact Boomers have are even more pronounced. Look at that absolutely enormous bulge—the Boomers are so much more populous than ANY of the groups that came before them.

These enormous generational numbers have had a profound change on the housing market, and drastically affected house prices as they exist today. How so? To begin with, sheer supply and demand. Your typical Baby Boomer left the house around 20, first child at 22, bought a house around 25, and was an empty-nester by 50 (note: numbers are estimates from previous reading). Since the baby boom cohort covers those born from 1945-1964,the average Boomer left home around 1974, had a child around 1976, bought a house around 1979, and was an empty-nester by 2004.

Go ahead and process those numbers for a bit. What sorts of changes do people tend to make around these ages? As a young, childless adult you’re likely interested in a location near amenities without the need for space. You’re more likely to locate close to where the centers of employment are. Then, when the first child arrives, you’re more likely to gravitate towards more spacious areas with better schools, further away from dense locales. And finally, as an empty-nester, you’re much more likely to relocate back closer to amenities, i.e. a city center.

If you look at the lifecycle of an average boomer, it’s shocking how well those dates match with what has happened in the housing market. As boomers flocked and stayed in the suburbs through the 1990s, we don’t see much price movement. The housing market remained fairly steady at a similar inflation-adjusted level to what it was in 1890. Builders built up new housing stock at the edge of metropolitan areas, which Boomers gratefully gobbled up en masse. There was little to no demand pressure on the population living in the city, closer to the city centers. The market during this time period was slowly rising, but mostly keeping up with demand constraints.

Case Shiller HPI data

Then the first wave of Boomers start arriving in the empty-nest category in the mid-1990s. Take another look at the graph above—the market is rapidly increasing. As empty nesters began to look towards the city for amenities and entertainment, the market suddenly begins to rise. After all, there are substantially more properties 30 minutes away from amenities than right next to it. Suddenly, the supply-constrained area of the market was back in high demand. The desired supply was no longer elastic, and the market began to feel the shocks. Coupled with this, the children of the Baby Boomers began leaving the house at this time to seek the same amenities. Two massive generations were competing for the same, supply-limited resources, and the massive jump in housing prices was a result.

Now we are in the midst of an amazing generational bubble, where two generations are fighting for the same scarce real estate. Take a look at the 2014 age breakdown again. The largest portion of Millennials are still in the age 20-24 age group—we’re still in peak Millennial, as it were. Average age at first childbirth has now risen to 26, and average age of home ownership has risen to 33. When will millennials start their own exodus to the suburbs, towards more space for their children? When will that wave move away, and dampen the high prices as they are drawn towards less supply-constrained housing?

A reasonable guess seems to be that by about 28-30, the average millennial will have vacated the city center. As of 2015, the median millennial age was approximately 26. The millennial demographic begins to lose significant numbers after the 20-24 age group, so we can assume that in about ten years, the peak of the millennial wave will have crested. In ten years the last big numbers of this generation will have exited the supply-constrained areas of the housing market in search of more space in the suburbs, and we’ll likely be seeing countless thinkpieces about the “Rise of the Suburbs”. Coupled with this, the aging Boomers in supply-constrained areas will likely be diminished through mortality and entry into assisted living facilities.

But despite the fact that this generational bomb will likely negatively affect housing prices, the Boomers left plenty of other legacies that prop up high house prices. Come back tomorrow for part 3, how Boomer political decisions will fight against generational forces continue to inflate the housing market!