San Fernando Business Journal – The Coming Crash in Home Prices?

No one can see the future. But when it comes to residential real estate, we can put our high beams on the road ahead by studying the buying and selling behavior of American consumers based on age. It is important for savvy investors to do what most people don’t; look at both sides of the equation. We must look backward as well as forward.

Home buyers over the past 60 years have been led down the path of focusing on location, interest rates, and inventory. But the most important factor to take into consideration may be something completely different. We need to study consumer buying patterns behavior based on age. 

Thanks to the U.S. Census Bureau and Dent Research, we can see that Americans tend to buy their first house at 31, their largest home around age 41 and on average sell those same homes at 78. The CDC reported 2/18/21 that U.S. life expectancy is down from 79 in 2019 to 78 in 2020. Notice life expectancy for Japan in 2020, by comparison, was 84, a 0.14/% increase from 2019, per Macrotrends. Born between 1946 and 1964, baby boomers are 57 to 75 this year. 

From 1980 to 2000, 40 percent of all homes purchased in the United States were on lot sizes of half an acre to 10 acres, according to Dent Research. That is a 20-year period where individual-thinking boomers were doing the same thing at the same time. In early 2000, I couldn’t live without a Westlake Village 5,000 square foot, 6 car garage, 6 bed, 7 bath McMansion on 2.5 acres either. Now I see how I was doing exactly what a whole lot of boomers did.

While healthy real estate prices are a good thing, indicative that the area is “an attractive city or country to live in with a good standard of living, good schools, and low crime. But nosebleed levels like 8 to 10 and even 20 times everyday incomes to buy an everyday house” in communities to include the San Fernando and Conejo Valley is ridiculous, said Harry Dent, Dent Research. In fact, wages paid to Southern California employees becomes higher to compensate for that higher standard of living, along with more expensive office, store, plant, and warehouse costs. This could be one of the reasons California is losing key industries to lower-cost cities and countries.

Dent said: “High real estate prices past a normal level of 3-4 times income in good cities only benefits the older people who already own real estate and who are going to work, but they produce less, and then die. It kills the standard of living for the new up-and-coming generation. It only encourages more focus on fixing up and flipping homes, instead of investing in productive capacity to produce real goods and services and for export and global competitiveness.”

It stands to reason that current prices are a direct result of 76 million Americans coming into the equation. It didn’t matter whether the population was legal or illegal, legitimate or illegitimate. With all of that demand for housing, home prices must go up. On the other side of the equation, it is reasonable that when boomers, who constitute 24 percent of the U.S. population go to heaven, the supply and demand principles come back to earth. When 130 years of residential real estate remains here after 76 million people go to heaven without their cherished McMansions, let me suggest where prices are headed.

When 76 million people go north to heaven it may be residential real estate prices, along with rental income, go south, straight to hell. A real estate bubble burst could cause West Coast prices to drop 50 percent, while Cleveland may see a 13 percent decline.

 

From 1929-32, New York real estate declined 69 percent, wrote Zubin Jelveh in “The New Republic” in 2009. That’s the same time that the stock market was off 89 percent, according to Yahoo Finance. Per Jelveh, “A homeowner who would have invested in a house on the eve of the Great Depression would not have recovered the full value of their investment until four decades later.”

Born in the 1900s the average age of death was mid-50s, according to the U.S. Census Bureau. So, adults died with great regret long before prices fully recovered in their lifetime. The same buy low/sell high stock logic applies to all highly appreciated assets. Savvy investors don’t let emotions or old habits dictate their behavior.  

There isn’t enough housing now. But look around the corner to see how that will change dramatically over the next 20 years. Let’s agree that none of us have ever seen 24 percent of the population go away. While it is difficult to see how pricing will play out, supply and demand eventually apply to every situation. 

Those who believe they have seen everything do not know that we have witnessed 70 to 80 percent declines in everything from the Dow Jones industrial average from 1929-32, Japanese stocks and real estate between 1990 and 2000, and the Nasdaq from 2000 to 2002. 

From what I can tell, Japan’s stock and real estate markets have not gotten back to their highs 30 years ago.  Something like that could never happen here again, right?

John Grace owns Investor’s Advantage, a personal finance planning firm in Westlake Village.

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