Though we have reverse mortgages available, you can’t help but think we’ll be enduring a baby-boomer housing liquidation sales event over the next 10-20 years. I think it’s already underway, and disguised as those wanting to “downsize and travel a bit”.
Hat tip to daytrip for sending this in from Wells:
https://www.wellsfargo.com/about/press/2014/middle-class-retirement-saving_1022.content
Saving for retirement is a formidable challenge for middle-class Americans, with 34% not currently contributing anything to a 401(k), an IRA or other retirement savings vehicle, according to the fifth annual Wells Fargo Middle-Class Retirement study.
Forty-one percent of middle-class Americans between the ages of 50 and 59 are not currently saving for retirement. Nearly a third (31%) of all respondents say they will not have enough money to “survive” on in retirement, and this increases to nearly half (48%) of middle-class Americans in their 50s. Nineteen percent of all respondents have no retirement savings.
On behalf of Wells Fargo, Harris Poll conducted 1,001 telephone interviews from July 20 to August 25, 2014 of middle-class Americans between the ages of 25 and 75 with a median household income of $63,000.
Sixty-eight percent of all respondents affirm that saving for retirement is “harder than I anticipated.” Perhaps the difficulty has caused more than half (55%) to say they plan to save “later” for retirement in order to “make up for not saving enough now.” For those between the ages of 30 and 49, 59% say they plan to save later to make up retirement savings, and 27% are not currently contributing savings to a retirement plan or account.
Sixty-one percent of all middle-class Americans, across all income levels included in the survey, admit they are not sacrificing “a lot” to save for retirement, whereas 38% say that they are sacrificing to save money for retirement.
While a majority of middle-class Americans say that they are not sacrificing a lot to save for retirement, 72% of all middle-class Americans say they should have started saving earlier for retirement, up from 65% in 2013.
When respondents were asked if they would cut spending “tomorrow” in certain areas in order to save for retirement, half said they would: 56% say they would give up treating themselves to indulgences like spa treatments, jewelry, or impulse purchases; 55% say they’d cut eating out at restaurants “as often”; and 51% say they would give up a major purchase like a car, a computer or a home renovation. Notably, fewer people (38%) report that they would forgo a vacation to save for retirement.
Read full article here:
https://www.wellsfargo.com/about/press/2014/middle-class-retirement-saving_1022.content
I think SoCal is fairing better in this.
Most boomers I know are planning to age in place.
But I run with a conservative crowd maybe.
That’s the biggest complaint I hear from some of my younger colleagues in the Bay area as well.
People don’t move after they retire there.
I’d expect that the majority wants to age in place.
How many will out-live their money though?
If you are 70 or 80 years old and broke today, you are probably OK because your housing cost is so low you can probably get by on social security.
It’s those who are 60 today and still have 20 years to go on their mortgage who either stick their head in the sand or are thinking they want to ‘downsize and travel a bit’. They list their homes at ‘retirement value’ prices, not at market value.
Most I know have paid for places by 60 but anyway.
From what I understand If they can get a little more than 50% equity, they can get a reverse mortgage.
if you are someplace with a high MR and HOA, that might not be enough though. I wonder how many get to 60 then think, dang why the heck did we move into a place with 10-15K a year MR and HOA costs, what were we thinking.
Half the boomers are probably fine. It’s the other half that will move the market.
One thing I think you have missed is the capital gains tax that many boomers in high cost areas would have to pay if they sold. Many bought their first houses in the late 70’s or early 80’s and traded up once or twice before the rules about rolling over gains changed. Even with a $500,000 exclusion for couples, a large number of boomers would pay six figure tax bills between the Feds and the state if they sold. If they are divorced or widowed, or they bought the property as a single person, the tax bill is overwhelming.
My take is anyone with a paid off mortgage and a below market Prop 13 tax base is going to stay put. The cost of housing is low compared to almost any other local alternative, and the loss incurred by selling is going to stop a lot of the “downsize and travel” folks.
IIRC, California taxes gains as ordinary income. The 3.8 percent Obamacare surcharge comes into play as well. Depending on your income and write offs, you could easily pay 30 percent or more of the net gain after exclusions in taxes.
My house will become a rental when I move out. No way will I pay the taxes on a net $600k gain.
Exactly! My PITI+ HOA on my $1Mish home is $2300. Current rental on my house would be about $4,200 per month. In 15 years house will be paid off and monthly T&I+HOA will be around $700. House has solar and drought tolerant landscaping. By then rent will be well over $5,000 and house could generate $4,000+ monthly income. In the down turn I picked up 3 condos under $100K for cash that generate $1,000 monthly profit which will climb as rents rise. In 15 years SS (if still around) should be over $3,000/month. The retirement plans are well funded as are the kids college funds. That’s well over $10K a month of income for travel with no downsizing! I’m not selling anything. I’m hardly exceptional and probably below average for the area.
But you are flush though. I’m talking about the ones who aren’t flush, and don’t have mega equity.
Let’s use SD County as an example, and specifically the folks who don’t live in the northern I-5 corridor.
From 1980 to 1990, boomers who bought their house for $100,000 to $200,000 had an initial mortgage rate that was double-digit. Rates came down, and they got on the refi train, forgetting that every time you refi, you sign up for a new 30-year ride. Kids needed help/college, the house needed work, and salary didn’t quite keep up with demand so they tapped a little of the equity along the way. Not a lot, just a little.
Lower mortgage payments have been available all along, and at some point in the sub-5% era they hit it refi button again, and knocked off a few hundred dollars off the monthly nut. Whew! But in exchange got a new 30-year ride.
Now the house is worth $500,000 to $750,000, but the mortgage is up to $250,000 to $350,000 which social security will barely cover. The 401k might be $200,000 or so, and the pension might not last.
The calendar is the real enemy. As people get older (55-70) they start to panic because they can’t work forever – heck, the boss has already been hiring new (and younger) people who work for less.
What do they do?
Half put head in sand, hope for the best and go to church more often to say their prayers and then pick up a lotto ticket on their way home.
The other half imagine ‘downsizing’ to a condo and/or moving closer to the grandkids. They put their house on the market for $750,000, go through 3 realtors and 12 months before finally selling for $625,000. They get the $500,000 capital-gains exemption, and a few bucks in their pocket that should last them – but they don’t have enough for a condo so they rent one instead, or buy an RV and see the country rest stop by rest stop.
Rich people who hang out with rich people don’t see this. But those of us working the street see it all the time – and these are the folks that will have at least some influence on the market for the next 10-20 years.
“From what I understand If they can get a little more than 50% equity, they can get a reverse mortgage”
I am wondering how many in the crowd above will take this route?
I would not get a RM unless I really really did not want to move and still had a mortgage at 62, other wise I think it is not worth it.
Myself, I think the population bulge 22-25 will have the biggest impact over the next 10-20 years.
I thought this was a NCC blog so why are we talking about people that don’t live in the northern I-5 corridor? The situation you described doesn’t seem to fit with the NCC market.
I’m hardly flush? I am about the same age as you and make far less than you. I’ve never had an AGI above $100K. Five years ago I had to buy out my ex which most of my neighbors didn’t have to do. Most have dual income households and bring home 2X and 3X what I do. Ordinary people with ordinary jobs like teachers, firefighters, engineers, sales etc. Not what anyone would consider rich people for NCC.
The flushing is just about done. Order has been restored for people like you and I that kept our heads down, did our jobs and lived within our means. The one’s who stretched buying things they couldnt really afford are done. Sure there are a few left but me thinks they are in the small minority now. Its time for us boomers to get back to living and enjoying the ride.
Just using it for an example – it applies in NCC too, just multiply by 2 or 3.
Sure there are a few left but me thinks they are in the small minority now.
They might be the small minority of the overall population, but they are the ones moving. It’s why we’re talking about them, given that this is a real estate selling blog. Whatever their actual count is will help determine the inventory count, and currently it’s so low that either you are right or it’s still developing. If they stay for the duration, we might just be left with estate sales only.
The thing about real estate is it takes so few sales to move prices one way or another. Most people know their home is worth 20-25% more than what it was 2 years ago but how many houses actually sold in your 100-200 house neighborhood over the past 2 yeas to push prices up that much. 5, 10, 15. Probably less than 10% of the homes sold yet you now believe your home is worth 20-25% more. Obviously it can work the other. If just 5-10% or your neighbors end up desperate to sell at some point why couldn’t prices go down 10, 15, 20%.
I think most people have a really hard time adjusting their expenses down. As you make more the tendency is to spend more. If you’re accustomed to living on $70K net income it’s going to be hard to adjust to a $40K income especially if you’re still paying that 2-3K refinanced mortgage. Are you really going to make that adjustment or are you going to say man I can get a half a mil and be able to enjoy my retirement if I just sell this house.
I believe as long as banks are allowing people to live in houses without paying their mortgage boomers will take advantage. Living in comfort and sitting on prices that aren’t realistic.
Are you really going to make that adjustment or are you going to say man I can get a half a mil and be able to enjoy my retirement if I just sell this house.
Exactly – and the Winnebago crowd will take the money and go. But they aren’t going to give it away!
Living in a Winnebago is actually quite expensive (unless you go to the salton sea free parking lot).
I think I would choose the RM or look into living over seas.
well it will be an interesting experiment.
Let’s call it ‘Winnebago’ crowd and use it as slang.
The article points out how many are saving money, or aren’t saving enough. I’m trying to figure out who the future sellers will be, and this group looks like they will be a likely bunch of folks who will be selling at some point. But I’ll admit that those in this predicament can change their mind, once they really look hard at the alternatives.
Let’s add a wildcard to the discussion.
The media (cnbc) is already critical of housing – here is their daily dose of punishment: http://www.cnbc.com/id/102115145
No one is paying attention now, but let’s say we get into March and April and the heralded ‘spring selling season’ is a dud. By then the waiting and patient buyers have seen flatline pricing for 12 months, yet sellers keep pushing higher and higher.
In 2014 we saw a tempered ‘soft-frenzy’ at best during the selling season, where prices went up some but not nearly as much as the previous year. Today’s sluggishness-caused-by-OPTs can be written off to the off-season, and you could make a case that if it weren’t for rates in the 3s we wouldn’t be selling anything right now.
Imagine if the sluggishness drags into 2015, and, at the same time, the Fed is forced to raise 1/4%. The mortgage markets over-react and bump us back into the mid-4s,. and by May, 2015 there are already sellers ‘dumping’ on price. In reality, they are only going back to where they should have started, but it will appear to the casual observers (media) that the market is falling apart.
The ‘Winnebago’ crowd that was thinking of selling in the next 2-5 years start to scoot closer to the exits. In some neighborhoods – ones like livinincali suggested, that only had a handful of comps the last few years anyway – a handful of sellers come on the market all at once. They haven’t done much improvement over the years, and what they have done is probably a negative anyway. They hire Aunt Bea to sell their house because she is willing to list it $100,000 over-priced to sit.
Stagnant City sets in, and eventually one of the sellers will keep lowering until they find what the market will bear. It won’t happen in every neighborhood, and of course it couldn’t happen in most of NSDCC. 😆
But areas built in the 1970s and 1980s that are full of long-time owners are particularly susceptible to a potential downdraft in pricing in this scenario.
Also add into the short-term equation that the local Case-Shiller Index will be turning negative any month now.
The Winnebago crowd is very small. At 65, not a lot of people are able to handle the full time RV lifestyle.
Some folks will move to be closer to the grandkids, if the location is less expensive. Some of the folks that have equity to harvest and no capital gains tax to pay will sell and move, whether it’s for the grandkids or for less maintenance and improvement in lifestyle.
Some don’t have enough equity to harvest or just don’t want to move. They will stay and hunker down. A lot of couples will start collecting two Social Security checks sometime between age 62 and 70 and supplement with their savings. They will try to keep the house for 10 or 15 years before throwing in the towel and moving into some type of transitional rental housing with what’s left.
I don’t see a liquidation, just like I don’t see a liquidation of stock portfolios. I think the generational transition will be gradual and orderly in most places. Certainly it will be in the highly desirable areas of coastal California.
I wonder what percent of people will be living off a social security check of about 1000/month for retirement? I am going to assume its a lot. At least 50% of the people are flat broke with nothing in savings.
Well Jim if this comes about you will have to start specializing in renting and managing properties. To prevent the “tax event” selling triggers, perhaps the boomers will rent the nsdcc house to someone else and rent somewhere smaller for themselves balancing the books that way.
Me thinks avgjoe is closer to street level than Another Investor, judging by their names!
How many of us actually know someone in the Winnebago crowd. My guess is few if any. Its a nice story but just a story.
The bigger story is the “wealth transfer” coming from the greatest generation. How many of us are looking at windfalls (hopefully later than sooner)? I haven’t factored any of that in my plans. I hope Mom (now 86) lives well past 100. Through the thoughtful planning she taught us her fixed income investments generate more than her annual living expenses in a top notch assisted living facility, have had no problem covering multiple stays in skilled nursing and are only growing in size. I don’t see any liquidation but rather a continued trend toward longer term ownership of prime real estate. We are blessed to live in one of the finest places to live in America and it is only beginning to realize its potential.
Oh and in case people think SD property is ludicrously expensive here is the London mini house and what it sold for: “http://www.telegraph.co.uk/property/propertynews/11182765/Britains-smallest-home-sells-for-275000.html”
The problem is that while some individuals that are doing well/ok won’t have to liquidate anything, those at the margin will. Margin is where the pricing is determined. What happens to the stock market when CalPRES has to sell some assets to send out the retirement checks. What happens when your neighbor has to sell to go live with the kids somewhere else because they can’t do it by themselves anymore. Those “have to sells” balanced by the buyer pool determine the price. The question is what do the wait and see folks do if they see asset prices falling. Crashes/liquidation events start with the highest leveraged or most desperate asset holders being forced to sell at any price and are continued by the wait and see folks who finally hit the panic button.
The reality is boomers are in their peak asset collection years. They are driving asset prices higher so they have something to fund their retirement. When retirement comes that peak demand for assets just isn’t going to be there and instead there well be an oversupply of assets for sale to fund consumption. While most aren’t going to give it away, all it takes is a few to give it away to affect everyone else.
I think you guys are discounting SoCal’s draw,
Retiree’s who can possible stay will (unlike say the north east).
Plus there are still a large emigration into SoCal (particularly Asia) and they all are not mega millionaires either so you see them a lot more in the inland and non-prime coastal area’s these days.
I sure am glad I’m not livininyourcali. That margin argument is BS. Pricing is, always was and always will be at the margin. So what? You are claiming supply will increase relative to demand but the facts are not on your side. The NCC housing market is very close to being built out. The population is growing faster than the supply possibly can. In another decade or two there will nearly no new construction left to be built but the population will continue growing.
Homeowners are digging in and the trends favor longer term ownership not the flipping up to a bigger home every few years we have seen the last decade or two. Those of us holding prime real estate are comfortable where we are. Nothing left to do but enjoy the ride and leave behind a nice estate for the kids someday.
I think a lot of people r wising up to the CA fairytale. You can retire and live cheap in a lot of other states.
Sure Ca has nice weather but it also has a large portion of people not working and on the public dole.
Come up and check out sacramento some day. Take a drive through the valley on highway 99. You will see a lot of poverty guaranteed.
The population not working outnumbers the people that produce. It is catching up to the middle class.
For a sizable price decline I think the Builders will have to blink first.
other than that I don’t see enough foreclosures to really get the snow ball going down hill.
Excellent points, Jim.
Don’t see where mannixpanix is coming from, though — we’re not past the earthquake, just the foreshocks. The big one’s still coming.
But wait, the California way is to cash in once the parents die. Unless you have too many siblings then you just fight it out and stop speaking to them after you walk away with 100k. Rough life.
Some will move, some won’t. Prop 13 and high rents will keep them put eating ramen noodles and leaving the yard a mess to the discontent of their new neighbors who paid a lot more.
I have been waiting to buy in prime Coastal areas for the last 5+ years … waiting for any/all of the following to kick in …
1) Foreclosure Tsunami … It never came.
2) Dollar Collapse … It actually became stronger.
3) Baby boomers to retire and go live in cheaper state … My landlord is one of those baby boomers. He keeps on buying and renting to suckers like me.
Here are the facts
1) We do not have any more coastal land available to build in mass. Supply is naturally restricted.
2) Our population growth projections are more aggressive than the past decades.
3) Globalization is kicking in the next gear… Prime Coastal Real Estate in North County is much cheaper than any average dwelling in average Asian city. Wait for Globalization V 2.0 to balance it out. This wave of Asian immigration is not the last one.
4) Middle class is becoming poorer. Sure but this has already happened all over other Mega Cities in the world. What happened to real estate prices there?
Current rents for a 3000+ sqft house in my neighborhood (92011 Aviara) are around $4000 per month.
Cost to wait for prices-to-fall is around $50,000 per year.
Nassim Nicholas Taleb, best-selling author of The Black Swan, told the story of a turkey who is fed by the farmer every morning for 1,000 days. Eventually the turkey comes to expect that every visit from the farmer means more good food. After all, that’s all that has ever happened so the turkey figures that’s all that can and will ever happen. But then Day 1,001 arrives. It’s two days before Thanksgiving and when the farmer shows up, he is not bearing food, but an ax. The turkey learns very quickly that its expectations were catastrophically off the mark.
If you’re going to age in place in a paid off property what does it matter what it’s worth. Is it an ego thing or is the equity part of your retirement plan. Maybe your little enclave will hold it’s value better than other places because of it’s exclusivity. Maybe it won’t, we don’t know. I just expect a massive de-leveraging in the future. Therefore I expect every asset that has it’s price derived from the availability of leverage to get hammered at some point. That would include just about everything people are holding to fund retirement. It’s just a demographic and numbers thing. I don’t think there’s much you can do about it other than get lucky (happen to hold assets that weather the storm) or get out early.
I wish you the best of luck, maybe you do get lucky with holding NCC real estate. It’s certainly possible.
The reality is assets like stocks are bonds are discretionary purchases. How much discretionary income does the next generation have to make those discretionary purchases. How many people do you have to compete with to get at that discretionary income. If stocks and bonds break down and all you have left is real estate equity what are you going to do. What is your neighbor going to do.
More nice stories but just stories. I am on the street living the life every day. To use your metaphor, we are not turkeys feasting at the trough not seeing the upcoming slaughter, we are squirrels building our store of acorns just as we have done all our working lives.
As for me, I may age in place, I may choose to rent this place out and travel the world mostly likely a combination of two. But I will have both choices. It doesn’t matter what my place is worth outside of what I can get in rental income for it. Its already more than I ever expected when I set my plan in motion 15 years ago and will only rise with inflation. My neighborhood is neither an enclave or exclusive, its a simple tract home in a big sea of tract homes full of hardworking, thoughtful people like me. In fact, I’m on the low end of the earning/net worth scale.
With all of this said, I’m prepared to be wrong and am taking steps to make sure I will be fine either way. I have a well diversified asset base conservatively invested. My stocks/bonds just crossed over 10% for the year so I’ll be looking to go back to cash soon. You two seem to have too much invested in being right and that IMO is a folly.