January 8, 1999

A look at future of housing markets

By TOM KELLY
The Real Estate Advisor

Last year, my mother moved from her principal residence for the first time in 46 years. No longer wanting the maintenance and space that comes will owning a large home, she "moved down" to a neighborhood condominium that saves her steps and taxes.

In the past two years, she's had sons and daughters who have "moved up," grandchildren who purchased their first homes, while others -- like me -- have stayed put.

What new circumstances will drive the next round of home purchases for my family? Will they be as conventional as the most recent? Or will they follow a surprise change -- like the 1997 change in the capital gains tax structure that permits a married couple to pocket $500,000 tax free, every two years on the sale of a primary residence?

That new tax wrinkle certainly has sparked housing conversations around our dinner table. Perhaps we will consider an "interim move" that would render a slightly smaller space and help pay college tuitions. Although I can't stand the idea of moving, I also have no clear answer for upcoming collegiate bills.

What is scary is not the reality that we are closer to moving down than up, but that I am now a member of the oldest of the three groups that will shape housing in the next 20 years.

I thought about these items (and the rest of my huge extended family's needs and wants) recently when thumbing through "Housing in the New Millennium," an evaluation and projection of demographics and economics shaping the future of real estate by the National Association of Realtors. The study identified Baby Boomers, Generation X and the Millennium Generation as the three demographic groups that will drive the future market. (What happened to my parents generation?!)

"Each generation will shift in its housing needs, keeping the housing market strong during the first part of the next millennium," according to Terrence M. McDermott, NAR executive vice president.

The study, one of the few surveys now in circulation where the word "millennium" is not followed by "bug," predicts increasing home sales and a steady level of housing demand. It states market growth will vary according to the changing wants and needs of several generations. And, like the new capital gains tax structure, those wants were accelerated by factors and numbers never before present.

The fastest growing demographic group will be the Baby Boomers (45-65 year olds) which means there will be strong demand for upscale housing and second homes. The number of single-person households is expected to rise, translating into a need for upscale apartments, condominiums and townhomes.

During the first 20 years of the next century, the United States population is projected to grow by an average of 2.4 million per year. This translates into 1.1 million to 1.2 million new households per year, meaning a continuing need for additional housing.

Although Generation X (born between 1965 and 1979) and the Millennium (born after 1979) generations are smaller than the baby boom (born between 1946 and 1964), a rise in immigrant and minority home buyers will offset a shrinking number of more traditional households.

In the next century, the home buying process will become easier and faster, spurred by deregulation and new technologies.

"The millennium generation is techno-savvy, and will do much of their home searching on the Internet," McDermott said. "Between 1995 and 1997, use of the Web in searching for a home grew nine-fold, and we expect it to really mushroom by the time this generation gets into the housing market.

"Millennium buyers will be more knowledgeable, and it will be common for them to show a list of prospective homes to a real estate agent, permitting agents and brokers to focus on professional services rather than educating buyers on the basics."

The millennium generation is expected to reach its prime first-time home buying age in seven to 10 years. The traditional market for first-time home buyers, 25-34 year olds, will be smaller. However, growing demand from immigrants, minorities and other "non-traditional" households will preserve activity in the starter-home market.

And, the survey points out, racial and ethnic diversity will continue to increase. By 2020, the white population will shrink from 76 percent of the total to approximately 64 percent. Hispanics will surpass blacks as the leading minority and will account for over 16 percent of the population. Blacks will be just under 13 percent, while Asian and Pacific Islanders will be just under 4 percent of the total population.

At the same time, the senior market will be growing. Three-fourths of seniors prefer to own their residence, but will want properties that are easier to maintain and located in proximity to recreation and services.

There will be exceptional demand for well appointed and easy to maintain single-story, single-family homes located within the same market area.

That sounds like us -- but we are a long way from being conventional seniors. It appears we were pushed into that premature, buy-down category by the surprise capital gains tax break. And, we will probably find or research our new property online.

Neither of those critical factors were present in any previous purchase.

Previous columns:

• Economist warns real estate industry to prepare for Y2K, 12-24-1998
• Realtors get the sales pitch, too, 12-18-1998
• More home shoppers fall into the Net, 12-11-1998
• RV owners can get a tax break, 12-04-1998
• Who owns listing to your home?, 11-26-1998
• Tuccillo sees 1999 as great for housing, 11-20-1998
• Realtors' web site is on a roll, 11-13-1998
• Wake-up call for borrowers, 11-06-1998