How Seniors are Contributing to the 2021 Housing Shortage
By Strategic Passive Investments
In February 2020, Curbed published an op-ed demanding that analysts, homebuyers, and the rest of the real estate industry “stop blaming seniors for the housing crisis.” Fast forward just 20 short but extremely eventful months and you will find that many people are still blaming seniors for the lack of affordable housing. Furthermore, that blame may be fairly placed in today’s pandemic real estate market.
In the Curbed piece, the author summarized the “problem” with seniors and affordable housing by explaining that Baby Boomers are often refusing to move out of their homes that many analysts expected would be re-entering the open market two decades into the 21st century.
“The theory goes like this,” Jeff Andrews explained. “Senior citizens historically will downsize into smaller houses as their children leave the nest. This allows younger families…to expand into larger houses. That in turn allows first-time homebuyer to buy starter homes that the younger families are moving out of.”
However, Andrews elaborated, homeownership had come “to a halt” in 2020 thanks to the financial crises in the preceding decade. He stated, “Baby Boomers who ‘won’t move,’ particularly those who live alone in houses that could otherwise be home to multiple people, are often blamed” for limiting the number of homes for sale and increasing the likelihood of bidding wars. However, he concluded, housing affordability and seniors’ unwillingness to downsize were, ultimately, not linked because in metro areas with high volumes of non-downsizing seniors, housing affordability was “not a problem.” That may no longer be the case today thanks to our hypercompetitive, hyper-limited housing inventory nationwide.
Why the ‘Silver Tsunami’ is Not Moving On
Today’s housing market is, in many ways, unlike anything that has been seen in the United States before. Although the country has certainly experienced housing booms in the past, those booms have not been fueled by a wildly contagious and mysterious virus that managed to shut most of the world down for the better part of a year. While there have been epidemics and pandemics in the past (the most recent being the Spanish Flu in 1912), most have tended to diminish housing prices in affected areas rather than sending them skyward. For relatively recent context, a 2003 SARS outbreak in Hong Kong led to a small home-price decline of 1.5 percent. While not comparable in terms of scale, this is the most recent epidemic that can be compared to COVID-19 without going back more than a century.
Today, housing prices have skyrocketed in large part because there is very little inventory available. COVID-19 created massive materials shortages due to issues in production and also difficulties dealing with shipping and labor costs. For seniors able to remain in homes that they currently own, the appeal of a paid-off mortgage and, in many cases, the presence of family members who have moved into the home to care for the older family member or due to financial difficulties of their own, creates an environment that does not foster strong interest in downsizing.
According to a recent study published by the American Advisors Group (AAG), about three in four seniors say that purchasing their home has been their best financial decision and the same number say their home “has become their most valuable asset.” In today’s market, this feeling of security outweighs the potential benefits of cashing out. In fact, 92 percent of seniors who own their own residence say they prefer to spend as long as possible in their current home. Fully half say they plan to stay in their current home for the remainder of their lives because of the pandemic.
“The urge to live in one’s home ties closely to a feeling of safety,” wrote AAG analysts. “More than four in five seniors say they feel safer at home than anywhere else.” Furthermore, 83 percent of seniors who participated in the study said that their current home would be “safer…than other living options.”
How to Handle the Demand for Inventory in Today’s Market
For real estate investors who may rely heavily on older homeowners to generate leads for potential deals, this information could become problematic if the current generation of “active seniors” does not elect to downsize into active living or senior living facilities over the next decade. However, all is not lost. Investors will, as always, simply find another way to get deals done.
For many real estate investors, that avenue to “getting deals done” will likely have something to do with new construction, which comes with its own set of complications. In many areas of the country, there are a vast array of constraints limiting new construction and development options. For starters, there is the fact that most residents would prefer to live in single-family residential (SFR) developments rather than multifamily communities, although this preference has eased off as the scientific community has begun to bring forward evidence that living in proximity to others in separate apartments may not be the pandemic death sentence originally believed. Nevertheless, the majority of residents certainly would rather live in a home with outdoor living space that is separate from the neighbors. This may not be earth-shattering, but with so many people spending more time at home, buyers are becoming increasingly determined not to settle. To build a community of SFR properties, investors need access to land – and that is not always in supply anymore than, say, lumber might be. Investors should look in areas of the country that still have developable land and that are business- and investor-friendly, such as many states in the south and southeastern United States. These states often remained largely “open for business” during the last economic shutdown and tend to offer more options for developers when it comes to finding capital in both public and private locations.
This past August, RocketMortgage released a list of the “10 Best Places to Build a House During the 2021 Building Boom.” The analysts factored in cost of construction, quality of materials, appeal of the community, cost of living, unemployment rates, and crime indices. All 10 cities were located in the south or southeast due, in large part, to a powerful combination of affordability and attractive climate.
For investors hoping to identify opportunities to invest in the southern area of the country by participating in build-to-rent or more conventional SFR construction, it will be important to work with an existing developer or investment team in order to access important connections that can help get the job done. With code approvals, zoning, and inspection timelines piling up even in the most aggressively pro-building states, the only way to create a predictable, reliable timeline for construction and final returns is to work with a firm already embedded in the area. As with so many things, finding the right partner can make or break your ability to turn this latest trend in housing to your portfolio’s advantage.