New realities for Baby Boomers

Question: what happens when you're a Baby Boomer, your home equity evaporates and the value of your retirement savings plunges?

Answer: You work longer!

Such are the findings from a survey conducted by pollster Harris Interactive retirement community builder Del Webb/Pulte. From a BigBuilderOnline.com story:

The study, which polled Boomers in two specific age groups--those turning 50 this year, and those turning 64--found that the average anticipated retirement age has been extended by about four years. Whereas a majority of 50-year-olds polled in 1996 said they planned to retire at 63, those turning 50 today said they expect to retire around age 67.

But what is retirement? The research also suggests that today's definition does not necessarily exclude professional pursuits. In the latest survey, 41% of 50-year-olds and 18% of 64-year-olds who are still working said they don't anticipate ever retiring. Boredom, self-satisfaction, and enjoyment were among the reasons cited for staying employed, but the No. 1 factor was financial stability.

Sobering as it may be, more Boomers are economically unstable now compared to a decade and a half ago. In 1996, roughly 11% of 50-year-olds reported they had not even begun saving for retirement; today that number is double. The study also found that nearly 40% of older Boomers who have already technically "retired" are continuing to work on some level...

Click here for entire story.

The future of new housing is -- foggy?

It seems that one of the most important lessons that the country’s builders learned from the past downturns was to immediately react when the market turned with generous incentives, price cuts and, over time, a dramatically scaled-down industry with simplified product lines that are now affordable to almost 60% of potential buyers.

As of September 2009, this slash-and-burn strategy has sent new home inventory down to its lowest level in 14 years, which would sell in just 7.5 months. And in spite of brutal competition from the existing home market – in which 30% of sales are for distressed properties – new home prices seem to have stabilized at just under $205,000, although that could be the result of buyers taking advantage of tax credits that were recently extended until April of 2010.

Since the U.S. population and related demand for housing continues to increase no matter the economic climate, when the economy improves and people decide they no longer want to live with roommates or their parents, it is clear that a dormant industry will be revived, as we’ll need 1.3 million housing units each year just to keep up.

What’s not so clear is how fast this rebound will occur and, more importantly, how future new home communities will be shaped, marketed and sold.

Over the past 30+ years, most of the new homebuilding activity was to follow the demands and tastes of the 78-million-strong Baby Boomer generation, from starter homes and move-up housing to vacation homes, retirement communities and even condominiums in urban locations.

But according to a series of presentations at the ULI Fall Conference & Urban Expo last month in San Francisco, demographic changes in the U.S. will force many builders and developers to change how they build for a population that is getting increasingly grayer (older) and browner (more diversified).

In addition, the 70-million-strong Generation Y, having largely grown up in quiet suburbs requiring cars to run simple errands, have morphed into a gadget-obsessed cohort whose penchant for urban-oriented, walkable communities and cynicism for traditional marketing techniques will require an entirely new skill set from an industry that has long relied on precedent in the hopes that each new rebound will be much like the last.

Maybe not this time.

For one thing, according to Reach Advisors, overly rosy demographic projections of the past were used to justify multiple years of over-supply for empty-nester projects in urban areas (especially high-rise condos), vacation homes and traditional retirement communities at a time when many Baby Boomers prefer to age in place.

Moreover, even if they want to trade down to a smaller home in an active adult community, today’s over-55 homeowners are sitting on a huge supply of large homes in suburban areas against a backdrop of potential buyers that’s not just smaller, but less interested in this type of car-centric community. When many Gen-X buyers do trade up, they’re placing an economic priority on community characteristics (such as a mix of uses and population and access to transit options) rather than a large home with a premium lot.

But it’s really the Generation Y cohort – with three times the population of Generation X -- that will foster in the biggest changes to the building industry as these ‘echo boomers’ began to enter the workforce, create their own households and bring their own, separate demands to builders of homes and apartments.

For one thing, the gender gap that existed just a generation ago – in which men earned more college degrees and more money for the same job – has almost completed a polar shift, giving many women control of the household finances and home-buying decisions.

In addition, accompanying more education for Gen-Y households has been a delay in marriage and having children, thus changing both the timing and type of demand for housing needs. Most importantly, however, with today’s Gen Y woman being more fiscally conservative than her male counterpart, builders will have to change how they merchandise and model their product to appeal to this new reality.

Fortunately, there’s another reality that will allow the industry to adapt to these echo boomers: this shift will not be seen in weeks or months, but years and even decades.

What will the Boomers' loss of wealth mean to the building industry?

With 401k balances reduced by up to 50% or more and housing prices down by 30% to 40% in many markets, most Baby Boomers find their current wealth to be far less than it was just a couple of years ago. So what will that mean for their retirement plans -- including moving to other areas? A story at BuilderOnline.com tells more:

Many baby boomers who contemplated easing into retirement may now find themselves in far more precarious financial straits in the wake of a collapse in the value of homes that, for a sizable number of boomers, were their primary nest egg.

A new study by the Washington, D.C.-based Center for Economic and Policy Research (CEPR), attempts to quantify how much of boomers' wealth has been severely eroded by the double whammy of plunging house prices and stock values, potentially leaving them little to retire on other than Social Security and other government-funded benefits. The study's findings raise questions about the wisdom of fiscal policies attempting to reduce those benefits, and challenges notions about homeownership being the most effective way to accumulate wealth, given the propensity of housing bubbles...

The median wealth of 55 to 64 year olds in 2004 was $315,400. CEPR projects that this wealth will fall to $168,800 in 2009, or to $143,200 in the worst-case scenario. The average wealth drop would be 29% to $708,000. Even at the top wealth quintile, the average falloff is projected to be 25% from $3.8 million.

The 45 to 54 year old group is generally less affluent to begin with, so the hit it has taken from the downturn in the housing market is starker. The study projects the median wealth of this group will erode by 41% to $101,800 in 2009. In the worst-case scenario, the decline would be more than 45%. This group's average wealth will decline 36% to $408,500, with the losses in scenarios two and three notably larger. For example, in the second scenario, median net wealth in 2009 is $94,200 (a drop of 45 percent) and the average net wealth is $387,900 (a drop of 39 percent).

This age group's median equity in real estate was $83,600 in 2004, but that's fallen drastically since. For instance, in the first scenario, median real estate equity in 2009 is projected to be $27,100—a drop of 68%—while in the third, median equity is projected to be only $6,600, or a loss of 92%. The projected decline for 55 to 64 year olds from their 2004 equity median of $142,000 will range from 47% to 63% in 2009.

The wealth of baby boomers could be further compromised when they are trying to sell their houses. The CEPR study states that only 2.6% of 45 to 54 year olds had less than 6% equity in their primary residences, meaning they'd have to bring cash to a closing when selling their homes in 2004. This year, however, 17% to 28% of each wealth quintile (depending on which they fall into) would need to bring cash to close a resale in 2009. Even households at the top of the wealth ladder won't be immune: In 2004, no households in the top quintile of the survey had less than 6% equity in their primary residences. By 2009, between 10% and 20% of the most affluent households in this age group would need to bring cash to a closing...

The authors of the study conclude that, because of the housing bubble, millions of American families opted not to save during what is considered to be their peak saving years. "Even families in the fourth quintile are only projected to have $215,800 in wealth in 2009 in this scenario. In short, as a result of the collapse of the housing bubble, the vast majority of baby boomers will be approaching retirement with little wealth outside of Social Security."

The authors insist that the government needs to do more than simply let bubbles run their course, which is what they assert the Federal Reserve did during the last housing bubble. They also state that it "should apparent from these projections" that proposals calling for reducing Social Security and Medicare "are unrealistic given the financial situation of those near retirement."

The study's findings, say its authors, "should make clear" that owning a house isn't always the surest path to building wealth. And who is to blame for the mess homeowners find themselves in? Owners, in part. But the authors point accusatory fingers at "the economists and policy professionals who designed policies that pushed homeownership."

Builders might want to plan for fewer retirees than expected

For years, homebuilders and others across the U.S. have been planning for the wave of 78 million baby boomers to retire. However, a Business Week article argues that some of these past estimates have been too optimistic, as a combination of falling housing prices, a bear market in stocks and a gradual reduction in defined benefit pension plans will force many boomers to continue work well into their retirement years:

Companies from cruise lines to retirement communities and financial consultants have been planning for this mass retirement. They hope to profit grandly by selling goods and services to tens of millions of relatively young boomers with bulging nest eggs and decades of free time ahead.

But demography is not destiny—and it may not even make for a good business plan. It looks like fewer of those 78 million will be either rich enough or young enough at retirement to meet the expectations of businesses catering to boomers released from the workforce. This shortfall, and how it may dash such hopes, is the focus of a new study co-authored by Kevin P. Coyne of Atlanta's Coyne Partnership. In coming decades, "the size and growth rate of the U.S. retirement market will be much smaller than is widely believed," he says...

It's the long-term perspective, however, that sets Coyne's analysis apart. He sees permanent shifts taking hold. And the implication is that some portion of the billions companies are spending on services aimed at retirees could be misspent. Experts are bound to disagree on the scale of this investment, but in light of Coyne's report, creators of such services may need to rethink some of their assumptions.

For financial and social reasons, the propensity to delay retirement is increasing, Coyne says. The total number of retirees over the next two decades will grow by less than 3% per year, on par with the overall population, and could fall to as low as 1%, he says. By 2017 this will lead to some 5 million to 10 million fewer retirees than some marketers have been counting on.

Certainly, a shift is under way. In the first four months of 2008, about 30% of 65- to 69-year-olds were either employed or looking for work, up sharply from 24% in the last business-cycle peak in 2000, according to the Bureau of Labor Statistics. Look one rank down, at 60- to 64-year-olds, and 54% are in the labor force, up from 47%.

Social forces are also keeping workers on the job, says Joyce Manchester, an analyst at the Congressional Budget Office. With divorce rates up, more boomers are depending on one income. Many have children just entering college. And a greater number of women now hold white-collar jobs, which are less physically taxing and so easier to stick with than jobs women held in the past. What's more, boomers make up the first generation to fund retirement partly from finite pools of savings instead of wholly from guaranteed-for-life pensions. Says AARP's director of financial security, Jean Setzfand, "That makes them fundamentally more cautious."