Is That a Housing Bubble on the Horizon?
For many Americans, especially those 40 and older, a large piece of their financial nest egg is the marital residence. If they are doing well, we might say the marital residences since we see a lot of people with auxiliary homes in Florida and “down the shore.”
In the past few years, not only has the stock market provided handsome returns, but residential housing has shot up in value after years of so-so returns. In June 2021 my next store neighbor was all smiles as he reported that his 2,300 square foot split level sold for $480,000. The same house, next door just sold for $650,000. That’s an increase of $3,500 a month.
The real pick-up seemed to be the pandemic of Spring 2020. Money seemed to come out of the woodwork and there was a buying spree that reminded this writer of the mid-1980s when buyers would line up as the for sale sign was being hammered into the front lawn. Who were these buyers?
A report from the National Association of Realtors from April 2 reveals that the new trend in buyers is the Baby Boom generation. People ages 60-78 accounted for 42% of home purchases in 2024. What makes this all the more curious is that most of the literature out there in the last two years has been the same boomers crying that they can’t find a down-sized house at a reasonable price. So, it seems that they have decided to double down by adding more residential real estate to their portfolio. And, as we saw with the crazy acceleration in seashore prices during Covid, these buyers are paying cash. For them, interest rate rises are immaterial.
From the divorce lawyers perspective, certain ironies become apparent because we represent clients of all generations. The boomer parents are sweating over whether their kids will be OK. Many are staying employed to “help pay for tuition” or “put aside money for college” for the grandkids. Of course, they can’t see the fact that by not retiring they are blocking advancement by younger generations. Now it appears they are driving up or at least sustaining inflated home prices by buying the properties their children can’t afford. Many do so based on post World War II reasoning. Houses can only go up in value and they are a rock solid investment.
When dealing with any commodity past is not always prologue. And housing is a commodity with some headwinds forming. First, not many young folks celebrate devotion of their weekends to mowing and fertilizing their lawns. The suburbs around Philadelphia have seen an explosion in multi-unit housing (once called apartments). Thus, housing needs are shifting. Second, mortgage rates have sprung back to normal after a decade of being almost ridiculously low. This means that improvements like the deck addition or the replacement roof are going to come at 7% instead of 4%. And while the epicenter of the home insurance and homeowner association fees earthquake is in Florida and California, chances are those crises will be coming to neighborhoods near here, especially “down the shore.” Whatever the cause, weather is getting tricky and producing floods and other forms of storm damage not often seen in the past. Expect to see insurance and maintenance costs to rise as a percentage of your budget.
Last, but far from least, is the demographic issue. Americans basically stopped having kids in the late 1960s and that habit continues. The birth rate has fallen 35% since 1990. Historically, old people downsized and sold the “big house” to the next generation. As anyone running a college admissions office today can tell you, that pool of youngsters is contracting and among those who are in it are people who leave college swimming in student debt that embarrasses qualification for a mortgage.
Thirty years ago, my parent’s generation would have advised to buy a house and then plow some money into blue chip securities. U.S. Steel, Eastman Kodak, Sears, Xerox, Boeing and General Electric. If that’s all you did, you have had a pretty rough ride for three decades. The house has done well although a lot of your gain came in the last five years. Whether as a residence or a source of rental income, real estate is typically a long term investment where the horizon is a long one.
Addendum 4/12/25. A timely article but perhaps overstating the “crisis.”