Landlocked: When Homeowners Don’t Move Up or Down
In the wake of the 2008 recession and its subsequent recovery, homeowners are staying in place longer. Two opportunities have arisen, both of which are ripe to have great impact on the U.S. economy. Senior housing and home renovation will occupy a significant share of future economic growth.
The home building industry has entered a period of uncertainty, dividing market experts and leaving seasoned industry professionals unsure of what will happen next. Recovery from the 2008 recession has been different from its predecessors, slow and uneventful, now presenting signs that indicate both continued recovery and an imminent downturn. One thing is for certain: the fallout of the recession stymied the industry, placing two of the largest generations in history at odds. Baby boomers and millennials now have common interests in the market place. Homeowners are now staying in place nearly three times as long compared to data taken prior to the recession. Issues of land and construction costs further contribute to a complex market environment. Amidst the convoluted scene, opportunities in home renovation and senior housing have arisen.
The home building industry has been plagued by rising land prices. As a direct result of increased demand and diminished supply, land prices have steadily increased over time. The image below displays the change in land values from 1975 to 2015. While the state of the economy is a factor, there simply is a limited supply of land and as our population grows, the demand for the vanishing commodity drives up its price.
In addition to rising prices, home building has been further strained by a diminished labor force that has driven up construction costs and slowed development. Builders are still trying to catch up to pent up demand. Unfortunately, new homes have largely followed outdated concepts which, in the new economy, are only attainable by the mega rich. Before the recession, people purchased starter homes, and according to the National Association of Realtors, stayed for 5 to 6 years before moving to a larger home to accommodate their growing family and/or growing lifestyle. Affordability has restricted this natural progression of home ownership, and homeowners are now expected to stay in their homes for 15 years. Price-to-income ratio represents the price of a home relative to median annual incomes. According to Zillow researchers, from 1985 to 1999, homes in the U.S. were expected to be 2.6 times as much as the median income. The price-to-income ratio has risen significantly since. Yet, wages have not kept pace with the rise in home prices. A study by FreddieMac suggests that the price-to-income ratio reached 4 by 2015. As an alternative to the typical “McMansion,” housing developments have significantly increased density in an attempt to bring home prices down. However, the newly inflated competition of home buyers that now includes first time home buyers and buyers that historically would have been on their second and third homes has quickly driven prices back up, leaving many homeowners with overvalued property and first time home buyers empty handed. Mark Boud, Chief Economist at Metrostudy, suggests, “With housing affordability an issue in many markets across the country, millennials will be more inclined to purchase older, more-affordable, existing homes that will necessitate renovations.”
The “forever” home is a budding trend that will flourish in the coming years. Whether by external forces or by choice, people are staying in their homes longer. Existing homes often provide more land area than is available in a new development. Renovating an older existing home allows buyers to design and build exactly what they want, in lieu of choosing from a limited set of plans and options.
A personally crafted home on a larger lot is an enticing and potentially more valuable option. Millennials, a value-seeking cohort, will patiently wait and pursue this opportunity in mass. For homeowners that owned through the recession, their homes may not have recovered enough value to generate the necessary funds to move up. Furthermore, they are hesitant to pay the same or an increased mortgage for a home that may be overvalued. The percentage of homeowners moving up to their next home is the lowest in 25 years, according to Todd Tomalak, Vice President of Research for John Burns Real Estate Consulting. Moreover, the rising home prices and a record-low number of homes for sale have further encouraged them to stay, as remodeling has become a more attractive option. If the home value has increased enough, it provides the equity to finance a remodel. In fact, second home loans were up 10 percent year over year in 2016, according to Black Knight Financial Services. Home remodeling hit an all-time high in the first quarter of this year, according to Metrostudy’s national Activity Index. “Last year, people spent about $320 billion on remodeling — a 5 percent increase over the previous year,” said Tomalak. “This year, they are expected to spend $350 billion — a 9 percent increase.” The market will continue on this path until baby boomers transition to the next milestones in their lives.
Baby boomers, born from 1946 to 1964, make up approximately 76 million Americans. A report by the Government Accountability Office highlighted the effects of the recession on the personal finances of seniors. “While the recession has affected all age groups, older adults — particularly those close to or in retirement — may face a greater burden because they may not have the same opportunities to recover from its effects,” according to the report. “For example, older adults — generally those 55 and older — may have insufficient time to rebuild their depleted retirement savings due to sharp declines in financial markets and home equity, and they may experience increased medical costs.” Post recession, adults 55 and older have experienced unemployment, difficulty recouping losses and an increased reliance on social security. Rich Morin, a senior editor for the Pew Research Center expressed, “It used to be that your best retirement investment was your home…As people saw after the housing market collapsed, the value of their home decreased dramatically and so has their expectation of selling the house and moving to Florida and Arizona.” Those that were able to maintain employment have little time, but will continue to work, to recoup losses from the recession. On the other hand, those unemployed after the recession found it more difficult to find jobs. The median duration of unemployment for workers aged 55 to 64 jumped from 11 weeks in 2007 to 31 weeks in 2010. Eventually, many gave up on seeking employment and began calling themselves retired. Those that have drawn benefits from social security earlier than age 65, permanently receive 25 percent less in benefits than they would have if they had waited until full retirement age. Regardless of financial constraints and loss in benefits, boomers are continuing to retire at a rapid pace. A Bloomberg study indicates the number of Americans aged 65 or older without a disability that aren’t in the labor force rose by 800,000 in the fourth quarter of 2016.
There is a significant need for creative and affordable senior housing and assisted living facility solutions to accommodate this generation. To attract them, designers and builders must be prepared to address concerns and improve on concepts, such as affordability, universal design, resident privacy and dignity, homelike environments, personalization, technologically enhanced facilities, connection to the environment, sustainability and wellness.
The leading edge of baby boomers began retiring in 2010 and the remaining boomers will do so, at least, through 2030. The mass exodus will clear a path for rapid advancement and financial growth for millennials. In fact, by 2020, millennials are expected to make up 75 percent of the workforce in the U.S. This shift could relieve pressure on the bottom of the market. Millennials that were not able to initially get into the market will find it beneficial to do so. Retired adults will then have the market and incentive to sell their homes and transition into innovative and affordable communities that will support their fixed incomes. While these factors may contribute to sluggish new home sales, opportunities in senior housing and home renovation will continue to provide healthy economic growth for the foreseeable future.
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