Wednesday, February 6, 2013
Monday, April 30, 2012
Which movie means the most to you? Ben-Hur, Patton, Platoon, or Titanic. Your answer, of course will depend on what year you were born or more importantly your generation. While academy award winning movies may not seem that important, the sum total of experiences, values and ideas shared by a group, or a generation, shapes their priorities and often their buying habits.
Many of the baby boomer generation (post World War II era babies born between 1946 and 1964) purchased large homes during their peak earning years because of their growing family size. Roughly 75 million Americans are baby boomers made up of those 48 - 66 years old accounting for nearly half of all home owners. The trend for them was to move to suburban locations and commute to downtown work centers. It seemed like the American Dream was to live on a golf course.
As of January 1st 2011 the first of the baby boomer generation hit 65 years of age. Every day since then 10,000 boomers hit the golden age of retirement, and as they do some of them are hoping to cash in on the equity of their home, take their one time tax exemption and step into something less expensive that better suits their new lifestyle.
Their desire for a simpler life and their conscience decision to help create memories for their children and grand children will radically change the trend for housing and affect values.
In her book "Right House, Right Place, Right Time, Margaret A. Wylde, PhD explains the results of her research with thousands of boomers who either recently moved or planned to in the near future. Her findings revealed that factors that encourage 45+ buyers to seek out new residence include size of home, stairs, or dissatisfaction with their neighborhood or community. They want a community in a desirable location and a new home that is all on one level. At least 61% of all home owners surveyed, regardless of their current homes value, said their desire for low maintenance was part of the reason for moving. Also householders planning on moving are likely to accept a home on a smaller lot or to have no lot. While we would like to think that most of the north east United States is going to retire south and buy our homes here, her research showed that 1/3 had moved less than 10 miles away from where they were living and had moved less than 20 miles away. When householders did move distances of 100 miles or more they generally had a specific reason. The largest portion said they wanted better weather or better climate. The primary reason 45+ buyers cited for their move was to have a new house, and to live among others more like them. Although the home is part of the deal, the intangible fabric of the community is what really sells a home.
Some economists predict that as this trend begins, the stepping down baby boomers may be in for a shock.
The concern will be when the baby boomers decide to step down into a smaller house with less maintenance and a first floor master bedroom, a swell of large homes with outdated features and antiquated systems will hit the market and there simply won't be enough of the 44 million Generation X (born between 1965-1979) buyers to absorb the inventory. Gen Xer's grew up with the two income household, rising divorce rate and are the first of the latch key children. They saw their workaholic parents lose jobs that they worked hard at. As a result Gen Xers tend to be practical and independent. They have a "work to live" not "live to work" mentality. Not only will there not be enough of them, they tend to not want to be tied to a large house and mortgage and are less concerned with a house size as a status symbol.
The hope would be that the 70 million that make up the Millenial generation (those born between 1980-1998 also called Gen Y) would help absorb these homes. However the Gen Y perceptions of these large suburban McMansions are that they have a big carbon footprint and a pricey commute when you consider the cost of fuel. Their priorities seem to be smaller homes closer to work centers for several reasons. First, they are financially challenged because of the current economy and because of student loan debt. Second is because they like the idea of living close to their job and walking to work, and where the action is. A big house in the suburbs with a commute is not their vision.
So with a large supply of two story McMansions, with 20 years wear and tear on their inefficient heating and cooling systems and out dated kitchen finishes, and the potential for little demand because of fewer buyers and those buyers wanting smaller houses themselves, it is possible that some baby boomers who follow the herd and put off their step down may get pinched on both sides. They may find that their step down in size may not mean a step down in price. A bountiful supply of larger two story homes could make their used house value come down and the demand for newer, smaller, more energy efficient homes may drive up the price of the style of home they desire.
I know of a recent empty nester couple that made their step down purchase two years in advance of their planned retirement simply to take advantage of the low house prices and interest rates happening now. They increased their commute to their work by an hour for the next two years simply to stay ahead of the herd that will put their home on the market when the economy recovers only to potentially find little demand for their older home and higher interest rates. They bought in an area where their adult children and grand children will want to visit on the holidays and they started making friends with other boomers ahead of the curve.
If you are currently trying to sell, or thinking of selling, a large expensive home in a community that has lots of other homes on the market and prices are cooling off, here is one strategy to differentiate your home from the pack.
Consider offering all or partial owner financing. When I bring up this idea in a listing presentation I am usually met with some resistance and a reply of "we want all our money at once". Sometimes this is out of necessity, other times it may be the fear of the unknown. While there are obvious advantages of owner financing for the buyer, there are lots of benefits to the seller too.
First it may make your home sell quicker saving you time, money and inconvenience. All other things equal, a home offering owner financing can be marketed to people who would prefer not to use conventional loans. There are lots of scenarios that make a credit worthy person, who is not a low credit risk, seek private financing. Self employed or commissioned sales people to name a few.
You often get a higher price. Offering owner financing saves the buyer closing costs and therefore adds value to your home. All things being the same, a home with lower closing costs will have higher perceived value.
Depending on your state, owner financing is often considered an installment sale by the IRS and if structured properly can push tax consequences many years into the future. Refer to IRS code 453 I
Owner financing of course earns you income from the interest portion of the payment. The interest is usually higher than market rates and most often better than what you will earn in a bank CD. It is like converting you're your home equity into an annuity.
Lastly, if properly structured an owner financed note is legal tender. You can borrow against it, or use it as a down payment on your next property or sell it for cash. Usually when sold for cash however it is at a discount.
So if you are a baby boomer delaying the start of the leisurely lifestyle you have been dreaming of for so long, waiting until the market value of your big home to return, it is possible you may be waiting for quite some time. Weigh your options now and consider using your paid for home as an annuity.
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