COLUMN: Home sales to struggle

Talk around the coffee table is that plugging the hole in the Gulf was all the real estate market needs to rally. Not so fast, the problem with real estate reminds me of Whack A Mole. Gene Epstein rounded up the usual suspects-soft economy, increased lending standards, slow job growth, excess inventory-in a recent Barron’s column. Epstein added Uno Mas unforeseen hurdle for housing-demographics.

Historically, home ownership declines whenever household-age distributions tilts toward younger adults. A strong predictor of the housing market is household formation, according to demographic expert Peter Francese. Over the next five years, Francese forecasts a substantial increase in households formed by people under age 35, a group which predominately rents rather buys. To rub salt in the wound, he sees a decline in the number of households in the 35 to 49 age group and housing demand will dampen because homeownership soars in the age 35 to 49 demographic.

This dilemma originally surprised demographers. As baby boomers, born from 1946 to 1964, hit their childbearing years the expected increase in births never occurred. The “baby bust” generation, roughly including births from 1965-1977, was coined. Further complicating matters was the “echo boom” generation when births surprisingly soared from 1978 to 1994. I am not a demographic expert but my personal observation is that Yuppies must be required to have three children. Both of our children rode home from the hospital traversing three miles of bad dirt road in a Toyota Corona so we never qualified for the Yuppie manual.

Since there are more echo boomers than baby busters five years from now there will be more American households aged 20 to 34 years of age than those aged 35 to 49. Since boomers also dwarf busters five years hence there will be a decline the number of households most keen to buy-those aged 35 to 49.

Francese predicts that as boomers predominate the 50 plus age group the residential market demand could increase. Interestingly (and perhaps a boon for local real estate) this particular demographic area tends to buy second homes for vacation/investment. On the other hand, the 50 plus demographic is just as likely to “get religion” regarding retirement savings since the Social Security/Medicare largess current retirees enjoy may not be available. Between the dot.com bubble, the Great Recession and the housing market collapse this bunch might not be so inclined to take on additional debt in their elder years. 

Epstein believes that “the economy, as always, calls the tune in the housing market.” Singing along, maybe in lead, are interest rates. Generally, when the 10-year rate rises, home sales decline. Currently the 10-year US Treasury note is yielding less than 3 percent, a 25 percent drop since January. It appears the Federal Reserve is committed to low rates — at least for the near term. How long will investors be content with low yields?

Despite a favorable interest rate environment, home sales in both May and June declined nationally, historical demographics will not favor home-ownership until 2015.  In real estate, location is everything and where we live is highly desirable, we still face the same daunting headwinds.

Buz Livingston is a certified financial planner. He operates Livingston Financial Planning Inc. focusing on hourly financial planning and investment management. Contact him directly at 850-267-1068 or at buz@LivingstonFinancial.net.