Will Baby Boom Mean Housing Market Bust?
With nearly 8,000 Americans turning 60 every day, the generation that vowed to stay forever young is quickly nearing retirement.
While baby boomers themselves might find the aging unsettling, the shifting demographic will strain programs such as Social Security and Medicare, in addition to causing broader economic impact, affecting myriad private investments and public entitlements, according to a CNN Money story.
The graph below illustrates just how extreme the population shift will be. A number of experts warn that it may spark an asset meltdown that could weaken equity returns for a decade or more. Among those sounding the alarm is Jeremy Siegel, a Wharton School finance professor and author of the well-known investment guide, Stocks for the Long Run.
“The demographic trends of the past have just not been strong enough to offset all the other influences on the stock market. But this is the granddaddy of all demographic shifts. We have never witnessed anything like this, and I am convinced it is going to be a determinant of asset prices going forward,” Siegel said.
Stocks, he warns, could plunge by as much as 50 percent.
The flip side? For every doomsday boomer prediction, there is a persuasive argument that the same trends will play out calmly. In fact, those who have studied the subject generally agree that while difficult adjustments are on the way economically, a boomer-induced blowup is hardly likely.
Moreover, many investing pros are betting the opposite way — that boomer demographics offer great opportunities to build wealth.
Anyone managing a long-term portfolio (anyone hoping to retire) understands the subtleties of the often overheated demographic debate. Trying to guess how the market will play out 10-20 years down the road is an invitation to embarrassment. Yet underlying population trends remain clear.
The 78.2 million Americans born between 1946 and 1964 are living longer and staying healthier than past generations, with an average life span of 77 years, up from 69.7 in 1960. Americans 65 and older numbered 35 million in 2000, but are expected to reach 72 million by 2030.
The Census Bureau projects that one in five U.S. residents will be a senior citizen by then, and not just because of the boom. Extraordinary as it is, the boom was followed by a so-called baby bust, as cultural changes and the birth control pill led to a period of reduced fertility starting in the mid ’60s.
Given those trends, Siegel and others suggest that a stock market slump could come about largely as the result of supply and demand.
Boomers have amassed trillions in stocks and other assets. As they leave the workforce, new retirees will pull more and more of their money out of the market to spend on everyday needs and wants. Pension funds will also become net sellers as they cash out to pay their obligations. Those looking to unload real estate will find fewer buyers in U.S. housing markets, while stocks and bonds will also yield fewer takers.
In the end, just as boomers loading up on assets during their peak earning and investing years may have helped propel the real estate boom of the 1980s and ’90s, their selling would force asset prices to fall. Compounding the pain, the coming age wave also means fewer workers will be left with the burden of supporting a greater number of dependents.
“Stocks depend on earnings, and earnings depend on a growing economy,” says forecaster Harry S. Dent, who predicts a 12- to 14-year bear market getting underway around 2010.
Some aren’t so sure. Even if boomers do start selling their assets, they won’t all be calling their brokers at once (the generation spans 18 years, after all), meaning the pressure at any one point would be mitigated.
Moreover, other economists who have studied the issue say it’s hard, of not impossible, to pinpoint a cause-and-effect connection between population changes and market swings. Straightforwardly predicting how aging plays out isn’t as easy as some make it sounds.
Consider a 1989 paper co-written by N. Gregory Mankiw, a Harvard economist and former chairman of the President’s Council of Economic Advisors, titled “The Baby Boom, the Baby Bust, and the Housing Market.” The piece predicts a tumble in real estate prices beginning in the 1990s, due to population trends. That housing market crash, as we now know, never came.
The point, many economists say, is that even if the demographic picture does influence stocks, other issues matter more.
Skeptics also question some basic assumptions of the Chicken Littles. Robin Brooks, an economist with the International Monetary Fund who has studied the relationship between demographics and asset prices, suggests the model others use, in which consumers amass assets during working years and sell them off in retirement, doesn’t apply to everyone.
That’s because wealth, including stockholdings, is concentrated among the rich, with the wealthiest 10 percent of Americans holding some 90 percent of stocks. Average Americans, even if they emptied their retirement plans, would have relatively little stock to sell. The median amount in a boomer’s 401(k) is just over $44,000, according to Hewitt Associates.
Many economists who have studied the question conclude that even if asset prices do see some downward pressure, a nosedive is unlikely.
“The realistic concern is that demographic drag may lead to somewhat lower returns,” said MIT professor James Poterba, “but I think the concern about an actual decline in the level of prices is overstated.”
Even Siegel admits the 50 percent plunge in asset prices is unlikely, calling it the worst-case scenario.
The Florida housing market, which has the highest concentration of senior citizens at present, may be in a unique position to weather any such storm. Even with rising mortgage rates, the demand for housing in the Sunshine State - and its appeal as a retirement location - remains strong. Be sure to diversify your portfolio, but don’t expect the sky to fall anytime soon.
