Do the Senior Stats Add Up?

SAN FRANCISCO—Wouldn't it be convenient if someone had clear, intelligent answers to most of your CRE-related questions? Problem solved. Nina J. Gruen, a.k.a. Ms. Real Estate, a.k.a. the principal sociologist overseeing market research and analysis at Gruen Gruen + Associates, is here to answer readers' questions.

Dear Ms. Real Estate:

I recently read a newspaper article reporting that a significant percentage of retiring Baby Boomers will have insufficient funds for their retirement. The article presented multiple reasons for this sorry state of affairs, including the observed stagnation of middle class incomes, and the shrinkage to 13 percent of private sector workers participating in defined benefit plans. The most depressing statistic was that 43 percent of those in the lowest income quartile will not have sufficient savings for even their first year of retirement. As a housing developer, I am interested in your opinion as to how this situation is likely to impact housing markets.

—Senior Boom or Number Crunched?

Dear Number Crunched,

I read either the same or a similar article. It is indeed upsetting, particularly since 65 remains the most common retirement age and the fact that many of these retirees can be expected to live another 15+ years. Many lower-skilled retirees will fight the squeeze on their budgets by seeking lower wage jobs, such as clerking in grocery stores. Others with higher skill levels may be able to obtain part or full time employment within their field of expertise or become entrepreneurial. The downside is that those retirees continuing to work will often be competing with entry level workers entering the labor market, resulting in higher unemployment rates for the Millennial generation.

The lowest income quartile is not likely to have an impact on housing markets, but are quite likely to have an impact on governmental policies. The lucky ones will be able to move in with family or friends. The unlucky ones are likely to be homeless.

How the decisions of these financially challenged, middle income seniors will affect the demand and supply of housing where they lived before hitting what is, after all, a purely subjective retirement age, will depend upon both conditions within the local housing market and whether or not they have equity in their existing residence and/or other assets. Those homeowners with equity in their residences can augment whatever nest egg they have, as well as their Social Security payments, by selling out and moving to a less expensive rental or smaller home (if available) within the region. Frequently, this means seeking existing housing in further out, less expensive suburbs.

 In high cost areas such as those near both coasts, the size of the equity they cash out is likely to be significantly larger than if they are already residing in a lower cost area, and therefore they will be able to get more for their retirement years by moving to a low cost area either within their region or elsewhere. The incentive to move to a low cost area will, of course, also be economically attractive to those over 65 living in high cost areas as renters or with zero equity value in their homes. But, unfortunately, most of these retirees have very limited options and may be in the tragic circumstance of having too little cash to move to where the living is cheaper.

Whether the shift in demand from high cost areas to low cost areas turns out to be big enough to create significant demand for new housing depends on the scale of the induced migration and the amount of pre-existing vacant housing in those low cost locations that attract seniors. Some of these recipient communities will be financially benefitted. The degree of benefit is dependent upon the resources these retirees bring with them versus the public costs they induce, i.e. extra fire department and ambulance costs.

There is, however, another potential benefit to high cost, high demand coastal housing locations, and that is the price of housing, or at least the rate of the increase in prices, will be dampened as a result of Boomer retirees selling their single family homes to move to lower cost locations.

While those middle class retirees living in high cost areas and, of course, those in a position to use the equity in their homes as a piggy bank do have options, the reality is that a significant portion of the retirement population, like many of the unemployed and underemployed in today's economy who are below the age eligible for Social Security, are going to need help from friends, relatives or the government to maintain an acceptable standard of living. Only a more vibrant economy and a system that can train people for the skills required by the 21^st century economy can offer real hope to those of all ages who are trapped without enough assets, skills or luck to maintain an acceptable lifestyle.