Luxury Home Market Cooling With a Chance of Melting

The American economy is six years into The Baby Boomer Sell-Off.

It’s inevitable; people tend to sell their stuff as they age. The Baby Boomers, born between 1946 and 1964, are getting older. The youngest of the 79 million Boomers is 54, while the oldest is 72. And nine million turn 65 each day.  

This is a problem because in the 1960s, our civilization, started manipulating population growth with the advent of the birth control pill. Then the Chinese enacted the one child policy in the 1970s. Japanese stopped having children in the 90s because their economy couldn’t support them, and Russian men often don’t live past 59.

Balance is key for any population, but especially for one whose economy must grow and prosper. It should look like India’s population pyramid, below, a textbook normal demographic pattern.

The four phases of population development:

Phase 1: This is made up of newborn children and up to age 20. This population phase is an expense, because they must be fed, clothed and educated. They seldom have earnings, pay no taxes and have no investments.

Phase 2: These are the young workers, aged 20 to 45 years old.  They’re the spenders, they’re buyers of everything and, for the most part, must support Phase 1. They buy more than they can afford so they borrow money to get what they want and need. These are the drivers of an economy. As the Baby Boomers passed through this phase, they pushed the US economy to new levels of consumption.

Phase 3: Picture older workers, aged 45 to 65 years old in this category. Their children have moved out, most of their stuff is paid for, and they’re thinking about retirement. These are the financiers of an economy. It’s through their taxes, savings and investments that an economy is financed. Without their taxes, savings and investments, Phase 2 couldn’t borrow and buy all their stuff, and the government couldn’t run without deficit spending. It was Baby Boomers’ savings and investments that provided the capital for the development of companies like Walmart, Apple, Google and Amazon.

Phase 4: Retired, age 65 plus. They’re now retired, selling their stuff, using their savings and investments to pay their retirement expenses or moving them to safer investments to avoid risk. They’re also heavy users of social programs and are paying less in taxes. They eventually become a liability to the economy through their need for healthcare much as they were when they were in Phase 1.

 

 

 

This all works well if the population pyramid stays in balance.

  

As you can see above, the Baby Boomer generation is 25% larger than Generation X. Then Generation Y - the Millennials – is larger than the Baby Boomer generation. Having a smaller generation sandwiched between two larger generations is causing some problems for our economy, and in particular, for the luxury home market. If not for the Sub-Prime Crisis of 2007 – 2010, our economy would have sunk into a depression as the Baby Boomers started to take their savings out of the stock market in mass, because Generations X and Y (the Millennials) wouldn’t have been able offset the Boomers’ withdrawals, and we would have experienced a normal correction and reboot.

For many Baby Boomers, the Sub-Prime crisis meant postponing retirement, so their high paying jobs didn’t open-up for Generation X. That meant loss of home equity or foreclosure and loss of jobs for Generation X. Collectively this resulted in a stock market correction, with fewer buyers for the Baby Boomers’ luxury homes and a short four-year recession. What was different was the government’s reaction.

In 2007, the US national debt was $8 trillion. In 2010, in response to the “Financial Crisis,” Obama introduced the nation to Quantitative Easing  to save the financial and auto industries.. This pushed the national debt to $13.5 trillion. Over subsequent years, through tax cuts and Congress regularly raising the debt ceiling, the debt now stands at $20 trillion. During this period, the stock market was on a nine-year surge, mirroring the injection of borrowed funds into the economy. (Chart at left.) This is how bubbles are created.

When will the Debt Bubble Burst?

Watch the The Debt Clock    

 

At the same time, investors were and are still increasing their participation in the market using margin debt - that is borrowing money against their current holdings to increase their investment in the market. This has added an additional $2,850 billion on top of the government’s $20 trillion of borrowed money into the economy creating a debt bubble. Remember what happened to the stock market and the real estate market, when this happened in 2002 with the dot.com bubble and then again in 2008 during the sub-prime crisis? 

  

I have a few questions:

  1. Is this stock market surge being financed by our national debt and other borrowed money and is thus an artificial stimulus that’s produced speculative investing?  
  2. How much longer can this go on?
  3. Are we creating a debt bubble that will burst and push us into a depression?  
  4. What trigger will burst this debt bubble?  
  5. As a Baby Boomer with a sizable investment in the market and a luxury home, what do I need to do?

At the same time all of this is happening, gentrification is sweeping the nation. It used to be that the educated and wealthy wanted to live in the xburbs and the poor had to live in the inner city. With gentrification, our cities have gained new life, and now many of the retiring wealthy Baby Boomers and Millennials want to live in the inner city. They want smaller places with less maintenance and a bigger life, and those less fortunate are being pushed out into a belt, which used to be called the suburbs, between the inner city and the xburbs.

The Baby Boomer Luxury Home Sell-Off

Let’s assume the stock market takes care of itself by holding its value and not causing the bottom to drop out of the real estate market. We still have the population evolution to deal with, namely The Baby Boomer Sell-Off.

First Baby Boomers will sell their possessions, antique furniture, vintage cars, sterling silver, art, and collectibles. After their possessions, the Boomers will dump their real estate. They’ll sell or pass on to their children rental properties, small business, investment and vacation properties, and then, eventually, sell their homes.

The luxury home “sell off” will come in three waves, the first of which is currently underway and is not having much price impact but is building inventory and lengthening the time it takes to sell homes in certain neighborhoods. This phase consists of Boomers selling homes so they can migrate to the Sunbelt, to the inner city, to their children or grandchildren or downsize to a smaller home. Below is a chart showing the impact of the Sub Prime Crisis and the Baby Boomer Sell-Off in Birmingham over the past 13 years.

You can see this selling has had little effect on property values because people can take their time to sell. But that, too, has a consequence. Notice the climbing number of homes coming to market and the number of unsold homes.

The second wave will come when Baby Boomers must leave their homes because of financial or health reasons. That is when they run out of money, can no longer physically maintain the property or need to go to a nursing home or move in with the kids. The average life expectancy for men in the US is 76 and for women 81. Backing off four years for assisted living, this second wave should start in 2020.  

The third wave will come when the Boomers die and their heirs, who probably live in another state, will want to unload the home. “Turn it into cash.”

Real Estate Prices will collapse, thanks to the Boomers

The far-reaching economic impact will surface with the second and third waves because Boomers’ money will be sucked out of the economy as they reduce their taxes, collect their Social Security, have their medical care paid for by Medicare, take their investments out of the stock market and sell their homes at liquidation prices. This will push the US into deeper deficit spending, remove liquidity from the stock market, push interest rates higher, depress prices and deflate the real estate market. This could be what bursts the debt bubble I referenced earlier. This scenario is already happening in Japan, where home values have fallen by 60% over the past 30 years.

This “turn into cash selling” will drag down neighborhood property values because many of the homes will be in places Millennials and Generation Xers simply do not want to live. This includes suburbs farther from downtown - places like Liberty Park, Greystone, Shoal Creek, and Highland Lakes.

We know a staggering 33% of Americans have nothing saved for retirement and that 52% of Boomers are planning to continue to work after they pass retirement age, a good plan until their health fails. The only way a lot of the Boomers will be able to finance retirement is by selling their homes. This Baby Boomer Sell-Off will continue throughout the 2020s, with home values hitting rock bottom sometime between 2030 and 2035.

This is bleak picture for the luxury home market in Birmingham and throughout the US, but we’re not going to experience this as much as other parts of the world.

      

 

Because of this demographic inversion China, Japan and Russia will implode or go to war in an effort to regain control of their economies. They’ll have no young workers to produce goods and services, thus they’ll have no tax base to support their aging population. They’ll turn to immigration and or invasion to broaden their population base.

What will the United States do as the world falls apart?  First you need to understand how we got here.  

In 1944, delegates from the 44 Allied nations met at the Mount Washington Hotel in Bretton Woods, New Hampshire to decide the fate of the postwar world. They created the World Bank, the International Monetary Fund and the International Bank for Reconstruction and Development, creating the foundation of the free-trade global economic system, the system we have today. Because of the free-trade global economic system, the US created a market for its goods around the world. Remember that while Europe was in shambles, mainland US wasn’t invaded. Our industrial infrastructure was up and running, and we became the world's’ supplier. But we paid a high price by providing our navy to keep the open waters safe and our military to enforce the free trade system. We paid more than our fair share for selfish reasons - we wanted to sell our goods, and we needed energy to build and run the largest manufacturing engine in the world and we needed the seas to be safe. As a result, the US became the world’s Super Power.

Seventy-four years later, we no longer need their oil because we’re rapidly approaching energy independence as a result of fracking and shale oil harvesting. With the price per barrel reaching $60, drilling for shale oil becomes more profitable, and production will increase. We don’t need their cheap labor; China’s wages have increased tenfold over the past ten years; Mexico and technology will provide all the cheap labor we need. We aren’t going to be the world’s Peacekeeper any longer. We had 10 aircraft carriers deployed around the world, but since 2015, we’ve been bringing them home, so we have just five stationed in US ports.

The US doesn’t need to be the world’s Peacekeeper  

January 2017: US President Donald Trump formally withdrew the United States from the Trans-Pacific Partnership trade deal. “We’re going to stop the ridiculous trade deals that have taken everybody out of our country and taken companies out of our country.”  

May 2017: President Trump at NATO: “Twenty-three of the twenty-eight-member nations are still not paying what they should be paying and what they are supposed to be paying for their defense. This is not fair to the people and taxpayers of the United States.”

November 2017: "We are not going to let the United States be taken advantage of anymore," Trump said in a speech at the start of the Asia-Pacific Economic Cooperation Summit. "I am always going to put America first, the same way I expect all of you in this room to put your countries first."  

December 2017: President Trump formally recognized Jerusalem as the capital of Israel, reversing nearly seven decades of American foreign policy and setting in motion a plan to move the United States Embassy from Tel Aviv to the fiercely contested Holy City. “Today we finally acknowledge the obvious: that Jerusalem is Israel’s capital.”

December 2017: President Trump: “Very disappointed that China is allowing oil to go into North Korea. There will never be a friendly solution to the North Korea problem if this continues to happen!”

The Immigration of the world's wealthy to the United States

As the world order changes, the wealthy of these nations will immigrate to the US. The Hurun Report released in 2014 surveyed the wealthy of China and found the more that two-thirds were planning to emigrate to the US.  Thousands of pregnant Chinese women come to the US each month to give birth so their children are US citizens.

The Government’s EB-5 program is a visa program designed to allow foreign investors to gain permanent residence (a “green card”) in the United States. It requires a minimum investment of $1 million, or $500,000, if the investment is in a rural or targeted high unemployment area where unemployment is 150% of the national average. The investment also must result in the creation of at least 10 jobs.

There are 10,000 EB-5 visas available each Fiscal Year (FY).

To qualify for the EB-5 program, immigrants can invest directly in a job-creating business, or can invest through regional centers approved by USCIS to promote economic growth in designated areas.

If the investor’s initial application is approved, the investor can apply for conditional residence in the United States. Once approved, the conditional residence lasts two years. After two years, the investor can apply to have the conditions removed and have the conditional residency made permanent, but only if the investment has resulted in the creation of a minimum of 10 jobs, as required.

Best of US Homes focuses on selling luxury homes; over the past year, 15% of our $750,000 plus listings’ showings have been to foreign-born buyers. This is because we market internationally, primarily through the Internet and our dedicated website, www.BestofusHomes.com. As an example, last June we were contacted by a man from Holland, who had qualified for the EB-5 Visa program and was opening a branch of his international business in Birmingham. He and his wife, who is Russian, were primarily concerned about security, wanting a neighborhood with a gate and a guard. Once they became familiar with Birmingham, security became less important. They discovered Best of US Homes on Zillow and then through our videos. We found them a home in Inverness. They paid cash, asking for all the furniture, art, linens, and flatware, literally everything in the house, because they didn't want to move their things from Holland and Russia.

The next five years are going to be turbulent and challenging for those in the financial markets and the real estate market.  I hope that you can see that Best of US Homes approaches its commitment to its clients different than most realtors. If you see yourself selling your home in the next five year I encourage you to put your plan in place now, the debt bubble will burst and when it does both markets will be effected and recovery will take many years.  Give me a call if you’d like to discusses your future plans.

If you'ed like to receive updates on the Debt Bubble and its effects on the real estate market send us your name and email address and put cool/melt in the comments section.  

 PS:

01/03/2018:  New York real estate has its worst quarter in 6 years
01/02/2017: The Next Debt Crunch  NPR Podcast
01/03/2018: December Auto Sales Drop – 2018 Forecast Looks Grim

12/19/2017: Student Loan Defaults On the Rise

07/17/2017: New U.S. Subprime Boom, Same Old Sins: Auto Defaults Are Soaring

 

 

Invite Kerry to speak to your group about the changing Luxury Home Market in Birmingham. BestofUS.kg@gmail.com   205 919 6006

Kerry Grinkmeyer is a real estate agent in Birmingham, AL specializing in the marketing and sales of luxury homes. Kerry's a retired financial advisor, he sold his firm, one of the largest in the Ameriprise Financial Advisor system in 2005 to his son, daughter and nephew. Now he's building one of the largest boutique real estate agencies that he'll eventually sell to his grandchildren. He is the author of the children’s book The Christmas Web - A Family Christmas Tradition. Kerry competes in the Senior Olympics in to 50M, 100M and 200M dash as well as the 5k and 10k time trial cycling events.

Kerry offers you his financial background, knowledge of the community, love of business and family and energy to assist you in one of the most important financial decisions you'll make in your lifetime.

 

Archive


January 2018

Luxury Home Market Cooling With a Chance of Melting

December 2017

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