How the postwar generation will shake up the housing market.
Due to their sheer numbers, the baby boomer generation has had an outsized impact on society. They have been driving cultural change and economic expansion since the 1970s. Lately, they’ve been influencing society in a new way—by holding on to their homes longer than expected. That trend, however, is about to reverse very suddenly, creating exciting opportunities.
During the next six years, according to Fannie Mae, between 10 and 12 million baby boomers will sell their family homes. This massive divestiture will create a huge opportunity for private lenders.
The oldest segment of the baby boomer cohort, now in their 70s, is beyond the typical retirement age. In the past, people at this age broadly sold their family homes and purchased smaller condos and apartments, often in warmer climates. So far, baby boomers have bucked this trend, with fewer of them downsizing in the aftermath of the Great Recession. This has contributed to lower inventory levels of single-family housing since the beginning of the decade.
Boomers own about 40% of the single-family homes in the U.S. As the oldest portion of the baby boomers progress through their 70s, factors including unavoidable health issues and their unprecedented lack of retirement savings are expected to finally push them to start selling.
The buyers for these homes naturally will be the emerging cohort of millennials, plus a good chunk of the Gen X group, ranging from their 20s to 40s.It’s been widely reported that millennials, in particular, have been living with their parents, marrying later (if at all) and are less interested in pursuing some gauzy vision of the
While millennials and the younger portion of Gen Xers do share many of those characteristics, it’s inaccurate to assume they’re less interested in home ownership. They’ve simply put off buying a home until later in life due to a combination of the aftermath of the Great Recession, the housing inventory crunch, the fact that they do pair off at a later age than prior generations did and their unprecedented debt from student loans.
Opportunities for Private Lenders
The conflux of these two conditions—boomers selling later in life and millennials buying later in life—will open up significant opportunities for private lenders because there will be regional disruptions in the market.
There are three characteristics to watch for, depending on the density of your market:
- In some regions there will be a glut of boomer inventory, driving housing prices down because there won’t be enough young buyers able to step up to the prices boomers expect to earn.
- Other markets will see a torrid pace of transactions between the generations where sellers and buyers are more evenly matched. Think of this as a jump ball of activity that lenders should be ready to participate in.
- Another group of more urban markets will experience surging demand for multifamily housing that features more amenities than usually offered, despite an
oversupply of boomer-owned houses likely to be on the market.
Let’s examine the opportunities for private lenders in each of the buckets mentioned above.
For the boomers caught in the trap where the glut of inventory will not keep pace with demand, lenders have an opportunity to provide services. As mentioned, the boomer generation is starting retirement with very little savings. Research by the Insured Retirement Institute (IRI) indicates that 24 percent of boomers have literally nothing saved for retirement, the lowest level since the study started in 2011. In fact, 42% have less than $100,000 saved. The majority of boomers will be living off their Social Security income. For boomers past retirement, this situation makes refinancing their homes almost impossible.
Private lenders, of course, offer financing based on the value of the property, generally not the income of the borrower. In markets with overstocked boomer housing for sale, sellers are going to need to make cosmetic upgrades to stand out from the pack. This means the opportunities to finance for fix and flip operators will surge.
In addition to financing flippers, some private lenders can also find new ways to directly finance the homeowners who need to upgrade their properties in order to sell them. This would include creating finance products that would enable a boomer homeowner to relocate, make necessary repairs and upgrades, and attract younger buyers. Of course, in structuring this product, lenders must keep in mind that lending directly to owner-occupied homes has inherent risks associated with it.
“Torrid” Transaction Pace
In markets where there’s a torrid pace of transactions to be expected—where there’s a good match between the expected surge in boomer sellers and millennial or Gen X buyers—speed will be of the essence. Private lenders can generate earnings by offering bridge financing to would-be buyers. Many fintech products offer rapid mortgages and are widely adopted by millennials. The largest of these is Quicken’s Rocket Mortgage, which promises a four-week turnaround from approval to closing.
In most cases, these products support buyers with higher credit scores. Subprime borrowers are an underserved market when it comes to speed, and this is where private lenders can really make a difference. In the hot markets, they can provide bridge financing to push a buyer’s offer to the front of the line, allowing them time to refinance after the sale with more affordable FHA, VA or other mortgage products that may be available to them.
Urban Multifamily Housing
In many urban markets, multifamily housing is likely to increase in appeal, provided the new units offer a rich layer of amenities and are situated in walking-friendly neighborhoods near good transportation options. These are neighborhoods like Trinity Heights in Durham, North Carolina; downtown St. Paul, Minnesota; Inman Park in Atlanta, Georgia; or Sugar House in Salt Lake City, Utah. Some of these markets have already seen burgeoning demand. The trick is to find other similar areas where high demand for millennial workers in good paying jobs is likely to transform neighborhoods. Traditional lenders have cooled to multifamily housing over the past few years, so there are going to be a multitude of opportunities for private lenders to support such projects and take advantage of this dynamic.
In the months and years ahead, you are likely to see many conflicting articles about the housing market as boomers start selling homes in droves. Some prognosticators are predicting doom and gloom from an expected glut of housing stock. It’s true that, in some regions, boomers will be in for a nasty shock as sale prices will fall far short of their expectations. Other pundits will report nothing but sunny skies ahead. The key for private lenders is to recognize that all housing markets are local, and that rapidly changing conditions, whether for better or worse, always afford growth opportunities for those who can step in and make a difference.