Tuesday, October 30, 2007

Demographics: the hidden force in real estate

A few years ago, I attended a conference in Trenton sponsored by the NJ Department of Labor about how aging baby boomers are influencing our state’s economy. As a real-estate editor, I was struck most by the work of Dr. James Huges, dean of the Bloustien School of Planning and Public Policy at Rutgers.

He and his colleagues had studied the real estate boom (this was in 2003) and concluded that we were not yet in a bursting bubble, but that things would take a downturn if we had appreciation of more than 11 percent for more than five years. He also came up with a stark reality that I had never considered before. The size of generation X, the first wave of the baby boomer’s children, is just a little more than half the size of the boomer generation. So as the boomers turn 65 and start downsizing their homes out of economic necessity, we are going to find that there are fewer buyers for the homes that the boomers are selling.

More recently, I discussed this phenomenon with Jeffrey Otteau, the East Brunswick-based appraiser and guru of market statistics who tracks prices in every New Jersey town in detail. He believes that when the first boomes turn 65 in a couple of years, we will see a dramatic effect: who is going to buy the McMansions when the boomers start selling them off?

To be sure, builders are already shifting many of their resources away from McMansions to build active-adult communities, just to address this phenomenon. But that’s not enough. If you look at the homes constructed in the 1990s and 2000s, the majority of them are large homes on fairly large lots that burn a lot of energy and may be unsustainable in the future. Oh, there will probably be buyers for some of them, but they will sit longer on the market and not appreciate as quickly, or perhaps they will depreciate more rapidly, after that 2009 to 2011 threshold when the boomers begin downsizing in earnest.

And yet, when I go to real-estate conferences, and I usually attend two or three each year, very few economists or professional real-estate brokers will even look at this phenomenon as they project market forces. In fact, the downsizing has already begun for some boomers, and nobody looks at this as a serious market force.

I don’t like to be a harbinger of doom and gloom. But I think buying or building an extravagant home in New Jersey will increasingly be a lifestyle statement, not an investment in the future. Think about it.

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