Boomers Have A Lot Riding On Real Estate

The Realty Times reports that baby boomers are loading up on real estate investments at a higher rate than other homeowners, potentially putting them in a risky position if their property lies in areas where prices are more likely to tumble.

One quarter of baby boomers, people who aged 42-60 have two or more homes, according to a 2006 survey conducted by the National Association of Realtors. That demographic also owns 57 percent of all vacation and seasonal homes in the U.S., and 58 percent of rental properties.

Among those who own rental investment property, 34 percent own multiple properties, 14 percent own two rentals, 5 percent own three and a small number own four properties. However, 14 percent own five or more rental units. Among those who own a vacation home, 13 percent own two or more vacation or seasonal homes, according to the Realtors.

“As a group, boomers are in their peak earning years and continue to wield great influence in the U.S. economy, but they are not homogeneous — there are significant variances in needs, behavior, attitudes and resources,” said David Lereah, NAR’s chief economist.

“On one hand, is an almost insatiable desire for real estate, with some owning multiple properties, and on the other, many have not adequately planned for retirement. What should not be overlooked are the discretionary spending interests of this generation, and their appreciation of housing as a great investment,” Leerah said.

What also should not be overlooked is that by virtue of their peak earning years, baby boomers are also at or near the age where incomes stop growing, become fixed or even shrink during retirement. Market consulting firms say some boomers, the so-called “mass affluent group” — those with assets from $100,000-1,000,000 — typically have real estate as their largest asset class (37 percent, to be exact).

With 23 percent in their principal residence and 14 percent in investment properties, they are at greater risk than those who can better afford to assume the risk by virtue of their income and investment diversification.

“Affluent investors have heavily tied their financial futures to the real estate market, which has been so hot for so long that many believe it has virtually no place to go but down. If the real estate market begins to crack, it is the mass affluent who will likely feel the effects both faster and with greater force. The fact that these assets often carry outstanding mortgages increases the risk further still,” said Catherine S. McBreen, managing director of the Chicago-based Spectrem Group.

Just ask tech investors of the late 1990s what they learned about one-sided investment portfolios. When investing in real estate and other vehicles, the fundamentals still apply and diversification remains a cardinal rule. Affluent households looking to make net increases in their investments over the next few months are plowing their assets into retirement accounts, deposit accounts, mutual funds and stocks — with only about 1 in 5 planning to buy more real estate.

“I’m not surprised that less than a quarter of those surveyed said they’d add to their real estate portfolio. After all, these people have seen very large increases in the value of real estate and, quite logically, probably think the market is overheated, as many do here in the Bay Area,” said Romeo Danais, a Silicon Valley real estate investor.

Still, Leerah says portfolios heavy in real estate have emerged as an investment strategy in recent years.

“Some boomers will take advantage of generous capital gains exclusions from their taxes when they sell their primary residence, and then place themselves in the position of being able to convert a vacation home into their new primary residence which would later become eligible for the same tax treatment,” Leerah says.

“Then, if their needs change in the future, they’ll be able to take the capital gains tax break after they have lived in that home as their primary residence for two out the five previous years. It becomes a great way to build and protect a nest egg,” he added.

That assumes, of course, there will be sufficient capital gains to exclude and profits to use. Real estate can be a viable investment, particularly in the highly-priced South Florida housing market, as those now enjoying vast returns know. But diversifying, at least by location, may be worth serious consideration — especially as higher Florida mortgage rates threaten to bring home values down in the next 18 months.