The Double Whammy for Today’s Buyers#

If you’re trying to buy a home right now, you’re up against two big things at once. The Federal Reserve is trying to slow down inflation, which messes with things. Even in places where houses are always expensive, they feel even pricier now. It’s gotten to the point where housing feels like a luxury that most first-time buyers just can’t swing.

You know that old saying, “The best time to start investing was 30 years ago, the second best time is right now”? Well, that might not hold up so well in today’s housing market.

Buying a home at the right time could totally set you and your family up financially for life. The catch? The “right time” was probably back when you were still in school. If you try to buy now, you’re looking at:

• Record high interest rates
• Record high prices
• Record low availability

…all at the same time. Fun, right?

The “Mexican Standoff” in Real Estate#

People sell homes for two main reasons: they want to, or they have to.

Right now, nobody who already has a home wants to sell it if they can avoid it. Why? Because most Americans with mortgages managed to lock in record low interest rates over the past few years. If they sell their current place and buy another one, they’d get a new mortgage at today’s rates. This new rate could easily triple their monthly payments for a house worth the same amount!

Think about these stats from the National Association of Realtors:

• 87% of new home purchases use a mortgage.
• The average down payment for a first-time buyer is only 7%.

This means avoiding higher mortgage rates is super important, almost at any cost.

A report from The Wall Street Journal even found that homeowners moving to another state would sometimes hold onto their old home and rent it out, then rent a different house to live in themselves in the new state. Wild.

So, where does that leave everyone?

• Everyone who wants to sell is waiting for interest rates to fall.
• Everyone who wants to buy is also waiting for interest rates to fall.
• Everyone stuck renting is being forced to compete with people who already own a home but don’t want to sell because they have that sweet, low interest rate locked in.

It’s like a Mexican standoff for the main players in the market. But the renters? They’re stuck fighting with… well, a banana. Not much of a weapon.

The only real hope for someone just trying to buy a home is to find someone who needs to sell.

Why the “Boomers Dying Off” Isn’t Your Housing Solution#

According to another report from the National Association of Realtors, the average home seller in America is 60 years old. At that age, yeah, sometimes people need to sell because they’ve passed away.

If you’re holding out hope that the biggest home-owning generation in America downsizing will make it easier for you to buy your first place, buckle up. I’m here to do what I do best and crush your dreams with facts and figures.

There are three main reasons why older generations permanently leaving the “above-ground” real estate market isn’t going to make buying a house any easier for you.

Reason 1: The High Cost of Getting Old

• They can take it with them… sort of. The money tied up in homes might not make it to the next generation in the way you hope.
• Inequality is worse in old age. Data from Lending Tree shows that 8 out of 10 Americans over 65 own their home. Even more surprising, only 19% of them still have a mortgage! They often own their homes free and clear.
• They’re selling, but not just because they’re dying. The fastest-growing reason older folks are selling their homes is because they need money to pay for retirement living.

Let’s look at the numbers on that:

• A Washington Post report found the median annual cost of nursing homes went from $65,000 a year in 2004** to **$108,000 a year in 2020 (when the article came out).
• Conditions in nursing homes have also been getting worse. Why? Because it’s one of the fastest-growing areas for private equity companies like Blackstone and Bane. They see it as a way to get higher returns on real estate by cutting costs and raising prices.
• In 2017, Blackstone closed a $745 million deal with Welltower (a Real Estate Investment Trust) to buy 3,400 age care units.
• Blackstone’s holdings are huge, but other private equity firms have raised billions directly for age living because they know the value is there by squeezing costs and increasing fees.

These companies make big profits off developments for a growing market of elderly Americans.

Now, most Americans don’t earn $108,000 a year, and even fewer can afford that kind of cost for retirement care. So, people are selling their homes to pay the steep fees these facilities charge.

While private equity buying up single-family homes from regular families gets talked about a lot, their role is often exaggerated. But they’ve figured out they don’t even need to own the homes to benefit from their value. States with the highest home prices often have the most expensive age care facilities. Why? Because elderly residents there have more money from selling their homes to pay the fees.

For older folks who can’t afford these costs, they often rely on limited Social Security and support from their own family and friends when they can no longer work physically.

• According to Federal data and a 2020 Brooking study, a little over 10% of American adults provide some kind of care to another adult.
• Usually, this is an adult child caring for their parents.

Jan Muchler, a director at the Gerontology Institute at the University of Massachusetts, told the Washington Post that when an adult child takes on these caring roles, they often have to give something else up, “sometimes that’s some of their work or all of their job.”

So, if you’re banking on an inheritance to finally buy your first home, it’s just as likely that this wealth will be sucked up by private equity companies for care costs before it ever gets to you.

And that’s just the first reason! Time to keep learning how money works to see why you probably won’t benefit.

Reason 2: Low Down Payment Loans Make Things Worse, Not Better

Think about when people started buying homes. In 2021, the median age of a first-time home buyer was 33 years old. Back in 2010, it was just 30 years old. People are waiting longer.

A survey of young home buyers by Freddie Mac and Bankrate asked why young people were waiting until later in life to buy. You probably don’t need me to tell you the number one reason: they wanted to buy sooner but couldn’t afford it until they had:

• Paid off student loans.
• Advanced in their careers.
• Spent years saving for a down payment.

In response to this problem, banks, non-bank lenders, and even the government have rolled out new financial products that offer home lending with lower down payment requirements.

We saw earlier the average down payment is 7%. This means some first-time buyers are putting down much less. How? Products like the Federal Housing Administration (FHA) loan insurance, which lets first-time buyers put down as little as 3% of the purchase price plus closing costs.

Companies like Zillow are even pushing this further, planning to offer 1% down payment financing to eligible buyers across the country.

If you’re hoping to buy your first home, these offers might look like they’re there to help you out. But honestly? They’re making the problem even worse.

Who do these lending products really help? The people who already own multiple properties. According to Redfin, that’s mostly Baby Boomers who own a massive $18 trillion worth of real estate.

Most of these low down payment loan products have limits on the total loan size, as noted in their disclosures. They’re typically meant for first-time buyers buying a “basic” home, which sounds fair. But all they really do is pump up the price of affordable homes until they become unaffordable again, often in an even worse way.

What these products do is shift the problem from the down payment (a one-time expense) to the repayments (a monthly expense for 30 years). Just because someone can get into a $750,000 house with only$10,000 down doesn’t mean they can afford the monthly payments, especially on a house whose price was inflated by these risky loans.

The only real winners are the people who bought these homes when they were a quarter of the price they are now and can sell them to buyers using risky financing.

And that’s the second reason why Boomers retiring from life isn’t going to make it easier for you to find a home. It was never just about age.

Reason 3: Wealth is Concentrating, Not Spreading

Let’s look at some other trends:

• According to US Census estimates from 2016, the number of families with children who owned their home dropped by 3.6 million in the 10 years before the survey.
• Families with children were opting to rent more, either for the flexibility or because they couldn’t afford to buy.
• Families that do own their home are having fewer children on average.
• The overall national homeownership rate has actually decreased by 3.4%.

Meanwhile, the small number of families that own multiple properties (as rentals or holiday homes) is growing.

• According to the 2022 Federal Reserve Survey of Consumer Finances, only 6% of Americans own property they inherited.
• Even fewer, only 3%, actually live in a property that was passed down to them.

Where are the other inherited homes going? They’re being kept by a small group of children from wealthy families as investment properties. Often, these are in addition to the homes they already own themselves.

So, if you’re thinking you just need to wait for the Boomers to pass on to finally afford a home, sorry to say the statistics suggest their estates are only going to become more concentrated in the hands of fewer people. Their age doesn’t matter as much as their wealth.

An article by Bloomberg surveyed people with adult children and found a majority reported draining their own retirement savings just to help their kids who were struggling to afford a place to live.

Consider the different family situations out there:

• Some families will leave multiple homes to a few children.
• Some families will make big sacrifices to help their children buy a home.
• Some families don’t have enough to help at all.
• Some families will actually need support from their children.

If you aren’t part of those first two groups (receiving multiple homes or getting big financial help), you’re going to be even further behind when assets are passed down.

And that’s the third reason why you shouldn’t expect a flood of new houses hitting the market when all the Boomers die. They aren’t exactly leaving them for you.

Where Are These Homes Going? Location and Investors#

A 2017 census report found that a third of counties in America were seeing more deaths than births. States like Florida have lots of wealthy retirees who’ve moved in and changed communities, sometimes displacing local families.

The homes that are left behind in these areas often don’t have what first-time buyers want – like access to job opportunities or good school districts. Why? Because retirees often choose places specifically to avoid those things!

If the people who inherit these properties don’t want to live in a community full of retirees, they have options:

• Sell the property. This does add supply to the market, but it’s usually not in an area where a typical first-time buyer is looking to purchase.
• Rent it out.

According to the State of Housing report published by Harvard University, institutional investors have noticed this gap. They are specifically targeting affordable homes, especially in the Sun Belt, because they offer a good return on investment given the risk.

The role of big players like private equity firms in the housing market often gets blown out of proportion, but they are a factor. According to a National Association of Realtors report, they accounted for 13% of all residential sales in 2021. It’s not time for “stupid f***ing laser eyes” just yet, but in the specific Sun Belt counties they’re targeting, they make up an even larger share of buyers and have definitely influenced the market there.

The Takeaway#

So, yes, Baby Boomers will eventually leave their homes behind. But they will mostly be leaving them to their already wealthy children or to institutional investors. Probably not the story you were hoping for, but I couldn’t pass up an opportunity to… well, you know… on your dreams, just to kick off 2024 right.

These are some pretty tough times out there, calling for tough measures. It’s why you see more smart, educated people than ever falling for scams that offer vague hope of escaping the rat race. This isn’t new; it’s been a theme during hard times for thousands of years.

To understand why this keeps happening, go check out my new video over on How History Works about why fraud never changes, but we still fall for it. You can find it here: https://www.youtube.com/watch?v=U12TK2Sa5HQ

Also, if you’re not already one of the 10,000 people subscribed to my totally free email newsletter, Compounded Daily, you should definitely check it out. Myself and some of the best finance creators around will be releasing major articles exclusively there in the new year. If you want to keep learning how money works, follow the link in the video description to subscribe.