A Housing Crash Will Hurt Baby Boomers Too, Not Just Millennials

Our crazy, volatile house prices hurt first-home buyers who buy near the top of the market and last-home sellers who have to sell near the bottom of the market.

Millennial first-home buyers who bought at the top of the recent boom will be hurt the most by falling house prices but those aging Boomers who will have to sell their homes in the future near the bottom of the market in order to pay for unexpected expenses like medical, assisted living, nursing home or other living expenses, will also be hurt.

House prices are naturally prone to booms and busts because the demand for houses can rise and fall a lot faster than the total number of houses can rise and fall. The total supply of houses increases extremely slowly because it takes longer to make a house than anything else people buy.

Although house prices are prone to booms and busts, our government policies make the booms and busts much bigger than they would be naturally. Instead of smoothing out the natural instability in house prices, our government policies make housing booms and busts a lot worse.

First-Home Buyers: Millennials

Hopefully, the many Millennials who bought their first houses in the last two years don’t end up like the many Gen-Xers who bought their first houses in 2005, 2006 and 2007. Many of those Gen-Xers were set back a decade financially when the value of their first houses tanked and they were soon underwater owing a lot more money on their houses than their houses were worth.

Those Gen-Xers did nothing wrong. They just happened to hit the first-home buying stage of their lives at the wrong time. They just happened to fall in love, get married, start a family or otherwise get serious about buying their first house near the top of a real estate boom.

Many of those Gen-Xers lost their houses, especially if they lost their jobs in the Great Recession. Many other Gen-Xers made their mortgage payments on time despite being severely underwater for many years. As recently as a few years ago it wasn’t unusual to see houses selling for about what the sellers originally paid for their houses more than a decade earlier, and that’s not accounting for inflation. In real dollars, they were selling their houses for around 25% less than they paid more than a decade earlier. That hurt.

Some Baby Boomers had the same thing happen to them if they bought their first houses near the top of the Savings & Loan real estate boom in the late 1980s.

The Economy: Deadweight Loss

Current home owners often feel good about skyrocketing house price, that is, until they have to buy their next house. They may make a ton of money on the house they’re selling but they have to pay a ton of money for the house they’re buying. Crazy high prices don’t help you when you’re buying and selling at the same time.

And erratic house prices are bad for the economy. When house prices unexpectedly increase to unsustainably high levels, home owners tend to save less money and spend more money than they would otherwise. Those skyrocketing house prices are great for the economy, at least for a while.

But then when house prices fall, home owners tend to save more and spend less than they did before the boom. The economy shrinks more during the bust than it grew during the boom. The economy ratchets down and home owners end up with less wealth just because house prices jumped up and then down. Not all recessions have a real estate bust but all the worst recessions have real estate busts, for example, the Great Recession.

Last-Home Sellers: Baby Boomers

In addition to hurting the economy and first-home buyers who buy at the top of the market, unstable house prices hurt older home owners who have to sell at the bottom of the market.

It turns out older folks tend to view their homes like emergency savings accounts. Ideally, they’d like to live in their houses forever and then leave them to their kids or family when they pass on.

Those who sell toward the end of their lives do so primarily to pay for unexpected life emergencies like medical expenses and nursing home care, or because they lost their spouse and their spouse’s income (for example, they now only get one Social Security check a month), and they need to sell their house to get money to live on. Most retirees don’t have a $1,000,000 in IRAs and 401(k)s.

Home equity is the largest part of the typical 75+ year old’s net worth. The Federal Reserve’s last Survey of Consumer Finances was in 2019 and it found the median net worth of households headed by people 75 years old and older was only $255,000. Their median home equity was $118,000, or nearly half of their total net worth (46%).

If that life emergency happens at the top of a real estate boom, all that house price volatility works out great for them.

But if that life emergency happens at the bottom of a bust, it just makes things a lot worse for them during one of the most difficult times in their lives. Those last-home sellers have less discretion on when they sell than first-home buyers have on when they buy.

Those who have to sell their houses near the bottom of the market due to illness, or the death of their spouse, make far less money than they would if house prices had increased more sustainably over the years without such huge price booms and price busts. Their Gen-X and Millennial children may have to pitch in more time and money to help mom and/or dad replace the lost home equity.

The huge volatility of house prices devastates first-home buyers who buy at the top of the cycle but that huge price volatility also devastates older folks who have to sell their homes at the bottom of the cycle.

Takeaway

Boomers, Gen-Xers, Millennials and Gen-Zers should first work together to eliminate the many government policies that destabilize their house prices and family wealth.

More sustainable house price increases would mean if Boomers have to sell in their later years they aren’t punished as much financially for having a death or sickness in the family in the wrong year. Similarly, Millennials wouldn’t be punished as much financially for falling in love, getting married, or wanting to start a family, and buying a house in the wrong year.

And our overall economy would be much larger if we had more sustainable house price increases. The U.S. would be permanently richer because housing busts can reduce economic growth for years.

It’s true that home owners tend to like it when house prices increase crazy fast but Boomer home owners should realize they may have to sell during any bust that follows unsustainable house price increases. The older they are, the more likely they’ll have to sell during any bust that follows.

More stable house prices would lead to more stable American families of all ages.

It’s too late now to stop the recent boom in house prices but we can decide now that in the future we want more sustainable house price increases and more sustainable family wealth creation.