Through all this mess, have you wondered how the experts could have gotten it so wrong? Remember when 2006 was a "correction year"? Then came 2007 and whoops! It wasn't corrected. Here is some food for thought that you can use, share with your clients or your peers. I hope it helps.
This is an age-related phenomenon. It was predictable, avoidable and is fixable.
As a 23 year veteran of the real estate industry, my career has survived more than one slump. However, for the duration of the current crisis, I have written to and requested more times than I can count to more experts than I can name with a simple request: Please analyze this crisis from a demographic perspective using NAR statistics, Census data and the historic birth rate as a baseline.
I did just that. I merged NAR stats with Census data and found that during the Baby Boom era, the average age of first-time buyers was 25 years old. NAR stats indicate that in 1971 there were more sales than ever recorded by NAR - this was the year the first Boomers born in 1946 hit the market as first-time-buyers.
From there, as the number of births rose or fell, the housing market rose or fell in the corresponding year 25 years later. This pattern lasted until double-digit interest rates hit the economy in the 1980's.
Fast forward to 2006. During the "bubble", no one was watching as the average age skyrocketed to 33 years old. In the meantime, the record-setting first-time buyers of 1971 were about to become record-setting sellers as the first Boomers turned 60 in 2006 - planning for retirement, selling their home to downsize or relocate.
With an oversupply of inventory in 2006, we needed to increase the number of first-time buyers coming in at the bottom, as every first-time buyer causes three or four homes to sell, with the construction of a new home at the top of the food chain as people are "bumped up".
However, the first-time buyers we needed desperately in 2006 were not there because 33 years prior in 1973, the birth rate plummeted. The birth rate in the 1970's mirrored pre-World War II rates, and this tiny group of first time buyers simply could not provide the demand at the bottom to absorb the enormous Baby Boom inventory.
Baby Boomers are all the sellers. The oldest would like to sell to retire. The middle would like to sell to build new construction. The youngest would like to sell to trade up. They are all SELLERS first, then some will become repeat buyers or build.
But they are all dependent on a first-time buyer to stimulate the trade-up cycle and beginning in 2006 and for four more years, there simply would not be enough first time buyers and those wishing to sell would be stuck in their current home with a sign in the yard waiting for a buyer to come along.
With all the excess inventory stockpiling in 2006 & 2007, somewhere in those homes were in fact persons in financial distress. There are always people in financial distress and headed for foreclosure. However, this time the unprecedented level of inventory locked those who really needed to sell right out of the market. They could not outlast the time frame allotted by the lenders and did not have the luxury of offering incentives or lowering their prices.
As a result, foreclosures skyrocketed. The news then turned to mortgage products, sub-prime loans and the mortgage meltdown - instead of getting to the root of the problem.
The root of the problem was a lack of first-time buyers who were not born in 1973. Everyone kept wanting to put them on the fence, and remedial action included lowering interest rates and sending everybody a $300 check. Lower interest rates will not create a child who simply was not born 33 years ago.
Three years later and we are now closing out our third solid consecutive year of this mess. The answer continues to be a lack of first-time buyers although with declining prices the average age has fallen to 31 according to the NAR 2007 Profile of Home Buyers & Sellers.
The good news is that there is an enormous segment of the population just an eyelash out of reach - those UNDER age 30. The births begin to rise again in 1978 and rise steadily in numbers which rival the Baby Boom.
Since we only need 1 first time buyer for every 3 Baby Boom sellers, the data would suggest that the segment under 30 will provide the sufficient demand necessary to sustain the market once they begin to come in. The key to getting them to come into the market a bit earlier than they would have on their own was realized with the first-time buyer tax credit passed as part of the Housing & Economic Recovery Act on August 1.
However, no sooner was the law passed and began getting some attention that those in the news responsible for educating the public instead scared the kids away from it "warning" that it was a loan. But the potential is still there.
Even without the tax credit, I believe if there were a sensible demographic analysis conducted and portrayed to the American public that they will respond.
If those who are able to do so understood the power of purchasing a small home and allowing that person to trade up and then that next person to build a new home - the public at large would make the connection that a renter who buys a small, used home may actually be saving his own construction job on a custom home.
I believe we could potentially be on the brink of a fabulous recovery. When looking at an Excel chart of birth rates taken from Census data, it is clear to see that the entry of this next generation will be like throwing gasoline on the burning embers of what was the Baby Boom housing bubble. The potential is there to have both generations in the market at the same time - making the previous boom look boring.
But the correct remedial action must be taken, such as remedial action that is age-specific and educating the public on the data and the power they have to correct it. I would have preferred the tax credit to be targeted to first-time buyers under age 30, but they gave it to all first-time buyers.
The potential power of the tax credit can be seen in the rise in home sales in September - a month dominated by news of banks collapsing. The tax credit was passed on August 1, the first-time buyers spent August shopping and closed on their homes in September. It was humorous to watch those on CNN scratch their heads in confusion when the numbers were released. But it was so predictable.
Through the trade-up cycle, the new construction market even saw a bump in sales in September, as people who achieved a sale then made it to the top of the food chain and could build a new home.
If nothing else, watch to see what happens after the first of the year. The tax credit was written to be retroactive to April 9, which means every first-time buyer who purchased between April 9 and December 31 will get the credit when filing taxes this next time. Since this age group can't wait to file their taxes, they all use tax services and electronic deposit - they will all find out during the first week of February that they are getting whopper tax refunds of $7,500 - $10,000 each. And they will be waving those whopper checks in front of their friends who will also want to get in on it, but it ends June 30.
I project an unexpected and inexplicable burst of retail sales and real estate activity from Valentine's Day to Memorial Day. But I would rather see the recovery begin immediately, and would love to see the experts explain this to people and speed things up. Too many people are suffering, when there is a solution right before us.
My final point is that I have been using this analysis, this approach and have developed supporting materials to use with my clients for the past three years. Every single person responds "that makes sense". I believe it will instill much confidence if people realize this was an age-related phenomenon. Most importantly, this will empower the people to solve the problem.
Feel free to contact me if you would like any of the charts or support material.