For decades the real estate industry’s message to consumers has been that housing is a good “investment.” Lots of reasons are offered – mortgage interest deduction, equity storage, even asset appreciation. But hardly anyone has asked the basic question: a good investment to whom?
Assets don’t own themselves; someone owns them. And it’s that someone who today is rewriting the rules of real estate, not the financial crisis. For decades, the real estate industry was organized to serve the Baby Boomers. Why they bought homes was because of who they are. Their decisions were personal, even emotional.
Buying and selling a home today still depends upon who you are, and more importantly: what you want from life.
Buying and selling homes is closely tied to personal changes in our lives. Leaving home, graduating college, getting a new job (or losing one), getting married (or unmarried), having a baby (who eventually leaves the nest) and so on. All of these changes influence how people live and the kinds of homes they want to live in.
More importantly, their life expectations influence how they plan to pay for that life. It’s why Boomers lived to work, but Gen Y works to live.
For Baby Boomers, the postwar argument was that homeownership offered a road through the American Dream. Home equity was the simplest form of tax-deferred financial savings vehicle. Home ownership became the savings-account that Boomers used to live their dreams: getting married, raising children, giving those children everything they didn’t have growing up, funding their college and even having some leftover for retirement. The lives Baby Boomers wanted dovetailed nicely with home ownership as a savings vehicle to finance that life, especially if started early enough and stuck with it over time.
That explains why home ownership as a good investment became a common cliche in the real estate industry: The average agent today is a 54 year old Baby Boomer. Home ownership was a good investment for them; why not for everyone?
Simple: The next generation of buyers and sellers don’t live the same way Boomers did.
Gen X looks at its parents (the early Boomers) and figures their strategy really didn’t work out at all. Gen X sees the “invest in your house” strategy as a “put off enjoying the good stuff today” and it doesn’t click. Taking cues from their parents who also got tired of that approach – many Boomers used their equity as an ATM machine during the boom to buy all the goodies they had been depriving themselves of for years – Gen X can’t imagine staying in a home for 7 years or more, trying to “pay it off.” Gen X even watched their parents spend all of the equity college tuition, just to have their kids move back in after graduation. Another not-good-return on investment. Any remaining equity was then washed away in a simple recession. From Gen X’s point of view, “savings” in the form of almost any investment doesn’t compute. That’s why Gen X’ers have little retirement savings, high credit card debt, and during the real estate boom, preferred interest-only loans so they could have the best house first, plus cash left over for the good life every day. Gen X lives for today, not retirement day.
Who Gen X is – double-income, no kids, married late, leased cars, best computers – argues against real estate as a good investment. Renting – with no lawn to mow or repairs to make – makes more sense to a Generation that wants the best today.
Gen Y is making a different set of calculations, and coming up with similar answers. Having been raised by the late Boomers to have everything they wanted all the time,, the Everyone-Gets-a-Trophy generation is looking at the recession-clouded future and deciding how best to maintain their abundance-oriented expectations of living. Perhaps this is why Gen Y remains unmarried until their mid-thirties, delaying child-rearing and even happy to live at home until their late twenties. Such decisions – to live house-free and even rent-free – leaves them plenty of cash each month for iPhones and entertainment.
Tomorrow’s potential real estate consumers – Generation X and Generation Y – aren’t long term “investors” in anything, at least not in today’s recession. Gen X is restless, moving every 3 to 5 years (except during this recession, which frustrates them more about having bought a home). Employment patterns amongst Gen Y – jumping jobs every year and a half – potentially suggests something about their home ownership needs. They value mobility over roots. As they change jobs through their 20s and 30s, they might move so frequently that renting simply makes more sense. Certainly there are few places left where the home appreciation exceeds the tax, maintenance and brokerage fees of buying and selling a home every two years that might entice Gen Y to not rent.
In the future, home ownership might not be a prudent investment choice for Gen X and Gen Y because the payoff requires living a lifestyle that simply isn’t who they are.
We might expect future “potential” buyers to rent for significantly much longer periods – perhaps into their late twenties and early thirties. Younger buyers are already trending toward smaller homes – and lower investment levels – to reduce brokerage fees, plus ownership costs (energy, repairs, taxes). Gen X simply has little interest in mowing an acre of grass. And for Gen Y, iPads, not McMansions are the status symbol of personal success these days.
Who you are determines what you want. If there’s no need for the school, the playground, the shorter commute (they telecommute) or retirement plan, the house-as-savings-vehicle makes no sense. In fact, home ownership itself –in the traditional sense – may give way to another form of living. Lifelong renting, maybe; or furnished leasing; or multiple time-shared homes around the world. When your job doesn’t require a commute time, only an internet connection, and your friends are spread round the world but connected by social media, why be stuck next to the neighbor’s barking dog all year long?
Everyone is waiting for the housing market to get “back” to normal. Yet it’s possible that will never happen. Not because financial conditions won’t improve, but because we’re entering a new normal driven by consumer demographics, not products. Home ownership will likely remain an appreciating commodity, but it might attract a different investor – perhaps Boomer landlords who offer short-term leasing to Gen Y , not average individuals. As the next generation of consumers – mobile, adultolescent, consumerist, globalized – seeks to finance their lifestyle, it might be that the savings-investment-vehicle of housing isn’t the “location” in the global market they want to live in.