We are into the eighth year of the real estate bull market. A strong economy, low interest rates and favorable demographics are among the factors behind the expansion. But the bottom-line reason for the real estate expansion: there simply aren’t enough houses for sale.
As we’ve written about previously, this shortage is a big reason young adults (millennials) are not buying homes at the rate of previous generations. For millennials ages 25 to 34, homeownership is 8 percent lower than baby boomers at that age and 8.4 percent lower than Generation X.
While things like student debt, changing lifestyles, and urban focus contribute to the young folks’ relatively low levels of home ownership, lack of affordable inventory is arguably the biggest problem. And for that we can partially blame the older folks: a clear and major factor contributing to tight housing inventory is seniors choosing to age in place.
On the surface, that’s a good thing. With improvements in health care, technology and education making aging in place easier, seniors can enjoy a higher quality of life in their golden years.
But there’s a downside: seniors staying put equates to 1.6 million homes held back from the market through 2018, according to a recent study by Freddie Mac. That leaves less inventory for young buyers looking for their first homes; and the diminished supply, along with increasing demand, push home prices higher.
For scale, 1.6 million houses is roughly the same as the number of new single-family and multifamily housing units built each year, and it represents more than half of the current shortfall of 2.5 million housing units, according to Freddie Mac.
Worse yet for the housing inventory issue, expect the aging in place trend to accelerate. The problem will grow as Baby Boomers increasingly enter their late 60s. There will be more and more things available to facilitate the elderly staying in place – seniors are healthier, support structures are being created, there are technological innovations.
Indeed, the year-end stock market volatility and hand-wringing over higher interest rates, seems to have had little impact on the housing inventory in some of the markets we watch.
What is the solution for the inventory lost from seniors aging in place? Obviously, it’s to build more houses.
But while residential prices have risen in recent years, construction is stuck in neutral. According to the New York Times, total housing starts grew at an annual rate of 1.2 million a year in January, more than double the recession-era low of less than 500,000, but still well below an average of 1.5 million from 1990 to the start of the housing bust – despite an expanding population.
Why isn’t there more home construction?
Many builders cite local regulations that make it harder to build homes in denser areas closer to jobs. Soaring land prices and higher labor costs in a tight job market are also to blame.
Whatever the reason for lagging housing construction, it’s clear that seniors will increasingly look to age in place, and Millennials will to continue to have a hard time finding houses to buy. Don’t expect the problem of tight real estate inventory to be solved anytime soon.
The Fund closed 2018 with a return of 9.02%, a solid showing for a year when equities experienced intermittent volatility, dipped into bear market territory in Q4, and the S&P 500 finished the year with a return of -4.38%.
As always, feel free to reach out with questions and interest in working with Aloha Capital in this excellent investment–Aloha LTD Income Fund.