There are 281,421,906 people in the USA; 105,480,101 households. Median household income was $42,257 in 2000. A majority of households, 87%, earn less than $100,000 per year. Only 33.7% of current homes are worth over $150,000. Why do so many real estate developers believe that more Americans can even afford a second home? Is there really a second home bonanza on the horizon?
The bonanza believers sight the aging Baby Boomers and their soon to arrive inheritances as top reasons for a second home boom.
This report attempts to refine some conventional wisdom:
Myth: Baby Boomers are going to inherit fortunes and will be able to afford multiple ‘whole ownership’ retirement homes and live luxurious lifestyles in retirement.
Fact: Most Baby Boomers will not be able to afford 2 homes in retirement, and the wealth transfer is going to affect far fewer boomers than previously predicted. They will need be more practical while enjoying the luxury of a second home in the sun and will choose fractional ownership, condo hotel or timeshare to afford multiple residences. As established by whom/what? I think it is important to state this.
With 78 million boomers (27% of the US population) reaching retirement age in the next 15 years, seeking retirement nests, and in their peak earning/savings years, it is easy to get giddy about the prospects for second home sales. Add to this statistic, The Wealth Transfer Effect, estimates range from $2 to $136 trillion in wealth will be inherited in the next 20 years, exuberance seems warranted. I don’t understand this statement - is this better: “Add to this statistic “The Wealth Transfer Effect”: estimates range that from $2 to $136 trillion in wealth will be inherited in the next 20 years, therefore the exuberance seems warranted”
The troubling questions are:
1.) Inherited wealth is a constant in an economy, what makes this so special?
2.) Will the money just stay in the family?
3.) How does this transfer of wealth change our economy and housing market?
How big is This Wealth Transfer?
Ken Dychtwald of Age Wave, Inc. reports that people over age 55 currently control nearly two-thirds of all the nation’s financial assets. They own some 40% of all mutual funds, 60% of all annuities and 48% of all luxury cars. The WWII generation’s thrift has however shifted toward consumption in recent years. Consider the bumper sticker, “Retired - Spending My Children’s Inheritance.” Reports indicate that the percentage of those older than 65 who say it’s important to leave an inheritance dropped to 47 percent in 2000 from 56 percent in the early 1990s. Only 22 percent of people over 65 plan to make a significant bequest. Why? One explanation is that families these days are more geographically dispersed, stretching familial ties.
American Demographic Magazine reported in 2003 “A weak economy, a sputtering stock market and a Social Security system that may run dry are all fueling skepticism regarding the size of the transfer of wealth from Boomers’ parents to their children. Since 2001, the stock market meltdown has erased some $8 trillion in shareholder wealth, slashing the net worth of Boomers’ parents. Plus, Americans are living longer, to an all-time high of 77.2 years in 2001, and increasingly cracking their nest eggs to fund their own extended retirements.” “Boomers are too numerous to expect a windfall,” says economist Laurence Kotlikoff at Boston University. “I’m sorry to burst anyone’s bubble, but there’s no economic justification for any bonanza inheritance.”
Less than 20% of boomers have yet to receive any inheritance, and the average bequest has been less than $50,000. More than 104 million (37%) are over 40 years old and looking for bequests from 33 million (12%) seniors, bequests that haven’t even started to flow yet.
If every WWII senior has a $100,000 net worth to bequest, $3.3 trillion will be divided; potentially $32,432 per boomer. $32,432 is hardly a windfall that will power a second home boom? Are you asking or stating? If asking, rephrase; if stating, remove ?
“Comparing themselves to their parents, 75% admit they’re more self-indulgent and 67% believe they’ll live longer. Yet Boomers understand that their lifestyle comes at a price: 84% recognize that they have to make more money to fund their retirement. A whopping 80% plan to work at least part-time during retirement, and 23% say they are counting on an inheritance to help fund their retirement. With this patchwork safety net, 65% of Boomers feel confident that they will have enough to retire in comfort. John Gist, associate director of the Washington, D.C.-based AARP Public Policy Institute, says that while many Boomers are better off than their parents were at the same age, “their expectations are also greater, and some will find their resources falling short.” From May 2003 issue of American Demograpics. If 84% of boomers do continue to work in retirement, a long term second residence is likely out of the question, but a shorter term seasonal second home will likely be more desirable.
In 2000, 33 million (12%) American households earned over $100,000. Second home buyers are typically between the ages of 47-62 years old, with household incomes over $100,000. This demographic is roughly 2.64% (22%x12%) of the US population or 7.4 million people in 2005.
If we assume that the wealthiest earners (12% over $100,000 in income) also have the highest net worth today, and that their parents also have higher than average net worth, we can expect that this cohort will receive larger than average inheritance. The wealth would stay in the family.
Today’s distribution of wealth is easily seen in existing home values. Consider only 33% of homes are over $150,000 in value, 9.1% were over $300,000, and only 2.9% were over $500,000.
Using this math, we can project the market demand for boomer retirement housing, using a few assumptions:
1. Boomers make up 27% of the population
2. They will demand a home of equal or greater value in retirement
3. Everyone wants to retire somewhere, and they would like to own it if possible
There may be demand for 10.5 million homes/condos/aggregate fractional shares over $150,000, 2.8 million over $300,000, and 900,000+ valued at over $500,000. This math correlates closely with the 7.4 million boomers with means to own a second home.
The only surprise in this data might be the idea that “fractional ownership shares” are mentioned in the analysis of this data? But it shouldn’t be. This is a generation that has ‘rethought’ all conventional views, and their retirement home of choice will not likely be in a traditional retirement community. Many boomers are awakening to the option of owning multiple residences by owning only the piece they want to use.
In 1980, only 32% of automobiles were leased. By 2004, over 70% of new cars were leased. Affordability and the desire to have a new car every 2-3 years was the reason. “Why own a whole pie, if you only want a piece?” was the advertising campaign that started the change of consumer acceptance of leasing. What will change the second home industry?
Bob Waun , Founder & CEO
bwaun@vacation-finance.com
As a VP at Paramount Bank, and while at Wells Fargo, Bob innovated lending for Condo Hotel projects. He holds a Master’s degree in finance/economics and BBA in finance from Walsh College and a MI Real Estate Broker’s License. He has personally lent over $750+ million in residential loans, and over seen operations lending $1+billion. He has been a professional guest speaker and taught numerous courses/seminars on real estate finance.
He managed controlled business relationships for a national real estate brokerage in MI and OH, held top sales honors for Wells Fargo in 7 states. Bob has a 17 year track record of cutting-edge innovation in the mortgage finance.
Since 2002, Bob has worked with condo hotel developers and lenders to improve the market for condo hotel financing.
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