Friday, November 10, 2017

A New Market is Emerging

Pay close attention to this headline. A new market? Yes a new market. I am a representative of the last or youngest of the Baby Boomer generation and I have been being 'harassed', imagine a winky emoji here, by AARP for several years already. Baby Boomers have not been driving the real estate market for three or four years. In fact Boomers are rapidly falling in the market as many have already settled into that "final" house. Kids are gone, they downsizing, the whole enchilada of retirement or empty nesting.

It has been Millennials driving the market and as buyers they represent more than a third of all housing transactions. This generation of young adults is often maligned by the Baby Boomers and often in an unfair way. I am the father of two adult Millennials who like me are at the "young" end of their generation. There are many projections pushed out in the media that Millennials are lazy and living at home well into adulthood, failing to "grow up" et al. Mostly that is B.S.

If one dives into the data beyond the surface, one will find that Millennials have a much harder time getting out on their own due largely to outside economic circumstances rather than any failure to "Grow Up". Sure, being a part of the "participation trophy" era definitely didn't help, but the over-consumption driven economy of their parents is much more to blame. Wages in the US have been stagnant for two decades now and the cost of housing, taxes, and most non-tech products have outpaced income. Millennials, no matter how motivated, will have a tougher time "adulting" than us Boomers had. The deck is stacked against them, but they are holding some good cards to play.

Millennials find themselves facing heavy college debt or low paying non-college degree jobs if they don't have to aptitude for skilled positions like electricians or plumbing, etc. This creates a difficult transition and Millennials often need an extra five years to get on solid financial footing. Millennials are less likely to rush out into the world and fail financially, and this added to the aforementioned higher cost of living, is why we see a longer stay at home period.

The upside is that these young Americans aged roughly from 20-38 are proving to be rather frugal. Not in an annoyingly stingy way, but in a smart financial management sort of way. Surprise! Millennials are going to have savings values more akin to the WWII or 'Greatest' generation than their Boomer parents. Boomers have been a huge consumer driven group and generally poor savers, Millennials are proving to be savvy savers and this is a very good thing indeed.

What does this mean to the real state market? It means that Millennials will continue to drive the market and will likely have nearly half the market share of transactions by the early 2020s. They are now becoming a heavy market influence as did their Boomer predecessors. They however, unlike their parents, are practical, frugal, and well informed. They will be patient, they will save for a down payment, and they will be amazing home buyers.

Builders are in for an abrupt kick in the teeth at least locally. They continue to build giant expensive houses that are more in tune with what Boomers were buying twenty years ago. Boomers are downsizing and many builders are ignoring the fact that Millennials are far less likely to have a large family of more than two kids, and are less capable of buying a "big" expensive house. Sure Millennials would love to have the space, but they are proving to be more cautious with their borrowing.

Millennials with a couple of kids will likely buy more modest homes than their parents. The 2500 plus square foot homes are less appealing to them not because they don't want the space, research says they do want big houses. They are likely to buy a smaller 1600-2000 SF, but nicer quality home, than the cheaply constructed 1990s 'big -n-crappy' homes that dot the landscape of decades past. Millennials are late to the market and many are skipping the 'starter' homes. But in our local high cost market, they are finding that starter homes are all they can swing financially.

Builders need to look ten years ahead yet they are only looking at next year. This bodes well for resale houses as Millennials will buy what they think they can afford. I see this group of young people often spending less than the bank will lend them and that is wise beyond their years. This is in harsh contrast to Boomers and Gen Xers that were spending every last penny their credit would afford them.

A new market is emerging and it is a market looking for practical use of space, modest but spacious dimensions, and high build quality. It is a market filled with people that can actually save for a down payment. This new market is filled with buyers looking for value and demanding quality. These are not bad traits my friends, these are the strong traits of their great grandparents rather than the consumption mentality of the Boomers. Although I have seen a great deal of market data suggesting the Millennial buyers want a big house, they also want to spend less than the bank will lend them, they are frugal, and they appreciate quality. Something has to give and based on the high cost of living locally it is the size of the house that they will skimp on, not quality or value.

For Millennials in the entry level price ranges of expensive markets like our local area, they may have to push the limits of their borrowing capacity. They may not like it, but they will benefit in the long run. Millennials are driving the prices of smaller entry level resale properties up because builders locally are not building what they can afford or are willing to pay. Oddly enough, older Boomers are seeking the same properties as Millennials. Boomers are downsizing and Millennials are practical. It seems we are moving back into a 1960s style of three beds and pair of baths for a large swath of America, Boomers that didn't save enough for retirement and Millennials that can't bust out the big cash of our expensive market. Builders better wise up. because a frugal, practical, and savvy group is coming their way.

Now I am not suggesting that the sizes will return to the 800-1200 foot range of decades long past, but smaller is the new world order in high cost markets like ours. Boomers complain that Millennials want it all and they want it for less. With 80 million of them entering peak earning years over the next ten years, they will drive the market to them. Builders will need to find a way to provide large living spaces with a look and feel of yesteryear while maximizing land use and cost per foot. It's a tall order but it needs to be filled. Get ready America, a new market is emerging, and it looks a bit like the mid-century market we had 50 years ago. It's just that the group is 30 somethings, rather than 20 somethings this go round.

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