Way back in 1976, I often read William Rickenbacker’s financial commentary in William Buckley’s NATIONAL REVIEW. I agreed with much of what he wrote but was always impressed by the remarkable clarity of his writing style. In a book that he wrote at about the same time, he took on the issue of home ownership.
He wrote—“Rent your house or own it?…….You have to do some pretty sharp figuring to come out ahead, one way or the another." As a young, single renter at the time, I raised this issue with many people. To a person, they all said that he was crazy. Homeownership was the only way someone like you (read loser) could ever have any financial security or build up any wealth.
Rickenbacker essentially stated that if you invested the $10,000 that you would use for a down payment (for a $40,000 house in ’76) and bought stocks with it, plus allocated $1500 to equities that you would have had to use for maintenance of your dwelling each year, the result would usually match or exceed the appreciation of the house. At the time, the Dow Jones Industrial Average (DJIA) was at 700 and today as I type is perched at 37,592. So, unless your luck was unusually bad, renting could have indeed worked out well especially when you add several decades of dividends to the mix.
A few years later, I was married, planning a family and bought my first house. Yet, Rickenbacker’s math kept gnawing at me so I suppose that is why residential real estate has always been a relatively small portion of my net worth.
For baby boomers such as I, purchasing your first home was a right of passage. Some 79.2% of baby boomers were home owners while today 66% of all adults are homeowners.
Recently, market analyst Meredith Whitney who became famous for forecasting the 2008 real estate debacle, is again weighing in on real estate. She says many things that are hard to argue with given, you guessed it, demographics. Many US adults are marrying much later than in the past, if they marry at all. In fact, she states correctly, that the rate of household formation is the lowest in 160 years (during the Civil War close to 600 thousand young men died so they never formed their own households). Now, the low rate is due to a strong change in lifestyles.
Another problem that she brings up is household affordability. Some lucky young people were able to obtain mortgages at 3-4% for several years. Now, with more realistic long term interest rates, many young adults are priced out of the market for the time being. Lifestyle wise, many seem to like their turnkey existence and 30 years of mowing the lawn has little appeal. The average age of current first time home buyers is 38 which has to be an all time high.
She raises a regional issue that I believe is absolutely spot on. Some states such as Utah, Texas and a few others will grow and housing permits and construction will continue to move ahead smartly. In some states such as New Jersey, parts of Pennsylvania, California and Illinois will likely lose population and housing prices may weaken.
She also warns of a “Silver Tsunami” in real estate. As more baby boomers (born 1946-1962) become senior citizens they will sell their homes and move to apartments, smaller houses or go to continuing care facilities. This could really hurt real estate values in the future.
While I agree with her demographics and how many millennials may never purchase a single family residence, the Silver Tsunami argument is a bit overstated to me. When many of we early baby boomers hit retirement age, a number of Wall Street forecasters and some demographers forecast that US stocks would plummet as we took our Required Minimum Distributions (RMD’s) from our 401k and 403B plans. It did not happen.
The same thing may hold true for real estate. Many of my fellow geezers want to stay in their homes as long as possible. Yes, some will sell and a number will have to sell. Yet, with 70 being the new 50, a large number will stay in place for longer than has been the case historically.
I am not criticizing Ms. Whitney. She has a fine track record and her opinions always merit serious consideration. The idea that real estate has no place to go but up in the future has been said for decades but today those people appear to be inducing selective amnesia regarding 2008.
Millennials face household affordability and student debt in many cases but also, a different vision of The American Dream relative to any previous generation in America. That will have repercussions in the real estate market of the future.
If you would like to contact Don Cole directly, you may reach him at doncolemedia@gmail.com
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