Magazine article Mortgage Banking

The Boomer Boost: Aging Baby Boomers Are a Key Demographic Force Driving Up Demand for Housing. This Huge Group-77 Million Strong-Has Played a Major Role in Pushing Up Housing Demand over the Last Five Years. What's Surprising to Some Is It's Likely to Continue Pushing Demand Higher in the Next Decade and Possibly Beyond

Magazine article Mortgage Banking

The Boomer Boost: Aging Baby Boomers Are a Key Demographic Force Driving Up Demand for Housing. This Huge Group-77 Million Strong-Has Played a Major Role in Pushing Up Housing Demand over the Last Five Years. What's Surprising to Some Is It's Likely to Continue Pushing Demand Higher in the Next Decade and Possibly Beyond

Article excerpt

IT HAS BEEN SAID THAT DEMOGRAPHY IS DESTINY. That is to say, significant changes in birth rates, longevity, immigration and other changes in the size and age structure of the population of a nation will reshape its society and determine its future. Nowadays some observers are saying demography is also destiny for the housing sector of the economy. [??] For the United States, the big demographic force is the aging of the baby boom generation, those born between 1946 and 1964. This celebrated generation has garnered much press since the surprise jump in birth rates that occurred after World War II, when America entered a new age of peace and prosperity. [??] The boomer boost is not the only one for housing demand. Immigration is also an important demographic factor, but one that, at least for now, is secondary to the aging boomer phenomenon. [??] The first boomer-related housing boost came when the generation first grew up, formed households and started their own families. What is surprising to many is that the boomer boost is back. [??] In the last five years, aging boomers have driven up overall demand for housing. Even though the oldest boomer turns 59 this year and the youngest boomer turns 41--well past the age when most people buy their first home--boomers are expected to continue to drive up demand for housing for the next decade or two.

The reason aging boomers continue to drive up housing demand is that homeownership continues to increase with age. The homeownership rate for householders does not peak until somewhere between age 70 and 74--and may not peak then for the boomers. In every age group up to age 75, "there are still families trying to build on their savings to make the transition from renting to owning," says Frank Nothaft, chief economist for Freddie Mac.

While the net gains in overall homeownership rates are not big after age 50, the sheer numbers of boomers enhances the impact as boomers age into higher-ownership-rate age brackets. "This is a big demographic group--the biggest demographic group in [American] history," explains David Berson, chief economist for Fannie Mae. He estimates that baby boomers may account for 40 million of the 111 million households in America, or 36 percent of all households.

Getting it wrong

The boomer boost and the likelihood it will continue for a decade or more fly in the face of predictions by some analysts. Byron Wien, managing director and the senior investment strategist at Morgan Stanley, New York, suggested in January that during 2005 "higher interest rates will finally begin to have an impact on housing." He adds, "While the bubble only bursts at the high end on the two coasts and at resort locations, the price of an average home declines after years of increases. Housing stocks drop in a flat market."

Wien's forecast is not the first. "We've heard people try to sound the death knell of housing for more than two years," says economist David M. Jones, chairman of Investors Trust Co., Fort Myers, Florida, and, for many years, chairman and chief economist at Aubrey G. Lanston & Co. Inc., New York. "They have said that the surge in prices and demand is too good to be true, that it can't go on forever." Some, like Wien, have predicted that higher interest rates would bring the whole housing boom crashing down.

"But people are missing this point [about demography]. They keep thinking it's a bubble, that's it's all cyclical. They are just totally wrong," says Jones.

Jones explains that the astonishing run-up in house prices since 2000 is not entirely due to demographics. Indeed, much credit for rising prices should go to falling interest rates. Lower rates since 2000 have "leveraged the demographic effect," he says. He points out that even as interest rates have started back up, there remains fundamental strength in housing demand, despite some predictions of dire effects.

Interest rates, even after several hikes, still remain "by any measure, incredibly low," and still remain a leveraging factor to the demographic effect, according to Jones. …

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