Why are Baby Boomers Important?

81 million US Baby Boomers* (born between 1946-64) began to reach retirement age (59 ½) in 2004. 28% of the US population is a Baby Boomer. 2016 is the peak year, with 4.3 million 59 year old birthdays. A Boomer turns 50 every 7.4 seconds this 2005!

*Many non-US Boomers will choose to retire in the USA to be closer to the world's best health care system. per year: 4,000,000 per day (4.0 mil / 365): 10,958 per hour (10.6 k / 24): 456 per minute (456 / 60): 7.1

Boomers have just begun buying their second/retirement homes.

Michigan has 234,000 second homes, California has 237,000 and Florida has 483,000. 6.4 million people own a second home, up over 40% since 1995. By 2010, an estimated 10 million people are expected to own a second home, despite 9/11, this is a 56% increase in just 5 more years and could be considered a boom market by any measure. More people will buy in the next 5 years than have purchased in the last 10 years, competition for desirable retirement residences will only intensify, appreciate in values will follow suit. Low rates have helped fuel this real estate market, but they are a smaller part of the equation than is commonly believed. Currency exchange rates have a much more dramatic inflationary effect on resort area real estate.

The trend began in 2001, and intensified as interest rates fell in 2002-03, causing some boomers to "buy early". Real estate further became the investment "du jour" as it became clear in 2001-02 that the stock market was 'not returning the level of investment returns' that many boomers had built retirement savings expectations around.

This lack of security and control in the stock market, and its positive effect on real estate investment, will be discussed further in this report. In addition, tax ramifications for second home ownership has helped encouraged second home ownership says the Wall Street Journal "In addition to low interest rates and demographics, the second-home market has been helped by the Taxpayer Relief Act of 1997, which established new rules for the treatment of a capital gain on a principal residence. Under the old law, taxes on gains were deferred if the seller bought a new home of equal or greater value up to two years before or after the sale of the primary home. In addition, sellers over age 55 could claim a one-time exclusion of $125,000." New rules repealed the mandatory gain-deferral and increased the exclusion to $500,000, as long as a taxpayer owned and used the principal residence for two of the five years preceding the sale date of the home. Plus, the exclusion now can be claimed every other year. These tax changes "liberated" sellers from the pressure to trade up to avoid a tax hit. Instead, says an NAR spokesman, it has encouraged many sellers to trade down to more modest digs, while using the remaining proceeds to purchase second and third homes. Tax changes have created a whole new form of property 'trading', where there is a tax advantage to buy a new home every 24 months, allowing a capital gain profit with zero tax cost. For many savvy investors, this has created a true 'cottage industry' in home flipping. "The second-home market can accommodate 100,000 to 150,000 new housing starts a year over the next 10 years", estimates David Hehman, CEO of EscapeHomes. But why second homes? As many professional people have discovered, as technology allows us to 'work from anywhere'; why not work from someplace beautiful, someplace 'vacation-like', from the cottage? The evolution of the home office has turned to the cottage office. The typical vacation-home buyer is 55 years old and earned $71,000 in 2003, while investment-property buyers had a median age of 47 and earned $85,700.

For properties purchased between mid-2003 and mid-2004, the median price of a vacation home was $190,000 compared with $148,000 for investment homes. In contrast with the last available full-year price data in 2001, vacation homes have appreciated 12.8 percent from $168,500, and investment homes have risen 25.4 percent from $118,000.

Nearly one out of five second homes will become primary residences after retirement - 27 percent of vacation homes and 14 percent of investment property. "In addition, buyers were looking to diversify portfolio investments," Mansell said. "This is now the most frequently cited motivation for purchasing a second home." In listing the reasons why they bought second homes, respondents said there were some differences depending on the type of home. Overall, 30 percent of buyers wanted to diversify investments, 28 percent sought rental income (37 percent investment vs. 7 percent vacation homes), 14 percent wanted a personal or family retreat (29 percent vacation vs. 8 percent investment), 6 percent planned to use for vacations (16 percent vacation vs. 2 percent investment), and 5 percent had extra money to spend.

"Because the typical second-home buyer is a baby boomer, it's likely over the next decade that second-home sales will remain historically high," Lereah said. "The boomers are still in their peak earning years and have both the wherewithal and the desire to purchase vacation homes and investment properties." Ninety-two percent of all second-home buyers see their property as a good investment. In addition, 38 percent said it was very likely they'd purchase another home within two years, breaking down to 47 percent of investment buyers and 16 percent of vacation-home buyers. The 9/11 effect, and family values is another unpredicted phenomenon that many experts sight when discussing the second home market. The theory says that as Americans were shocked by the events of 9/11, they wanted to create more 'family together time' and come together in vacation destinations where far-flung family members could rejoin as a whole unit. Drive-to destinations were first to experience the effects on family-tourism from 9/11, these resort locations within a 2-5 hour drive from metro areas actually saw increases in occupancy immediately following 9/11. The theory is still evolving, but through my own surveys of boomers, this effect has merit on cottage demand. Drive-to vacation cottages is still the fastest growing market. Can the demand for second home, resort properties and retirement residences be truly measured or is it just another version of real estate investment hype? A new study by NAR, shows that 23 percent of all homes purchased in 2004 were for investment, while another 13 percent were vacation homes. In addition, there was a record of 2.82 million second home sales in 2004, up 16.3 percent from 2.42 million 2003. The investment-home component rose 14.4 percent to 1.80 million sales in 2004 from 1.57 million in 2003, while vacation-home sales rose 19.8 percent to 1.02 million in 2004 from 850,000 in 2003. The figures have merit and factual measurement. Real estate values in nearly all 'vacation, resort, and retirement' areas have out paced the overall market by double digit (alarming) rates. The working communities of America are not only lagging, but in many cases falling in real value (when adjusted for CPI inflation).

(A note about inflation & currency: All too often we read reports about the increasing value of assets like real estate without any discussion of the cost of inflation in these increases or the exchange value of the currency being used to value the asset. If the dollar falls in purchasing value by 30% against other currencies, the value of real fixed assets should correspondingly rise by 30% (if they are desirable for purchase by foreigners). Real estate markets that have a high level of foreign investment will appreciate quickly as the dollar falls, and fall if the dollar strengthens (Hawaii circa 1990s). If the Consumer Price Index (CPI) rises by 3%, then the value of a home that rises by 5% has truly only increased by 2%. It is disturbing to this author that this is not more openly discussed by our mainstream press, who by profession are journalists with liberal arts degrees, not MBAs. Watch the true inflation-adjusted appreciation rate, no the media hype.) Can these high rates of appreciation in second home markets really continue? Many experts believe, "Yes!", it can sustain for a long run (not months, but years). The fundamentals of rapid appreciation equate to supply growing slower than demand. Supply in areas such as South Florida have been rapid (78,000 new or planned condo units entering the Broward/Dade county market by 2007), but material shortages and hurricanes have slowed the ramp-up and created a large amount of pent up demand chasing reduced supply. Also, the foreign buyer demand in the Miami area is extremely high, this means these buyers are using currency that is 20-30% strong than last year. A 30% rise in property values is easily absorbed in this environment.) In areas such as Arizona and Las Vegas, water concerns and lack of infrastructure and skilled laborers have slowed the rapid pace, but the grow rate is still staggering. Other scenic second home destinations, like the mountain states, Pacific Northwest and Florida Keys have environmental hurdles which raise the barriers to entry for developers and restrict supply. A restricted supply in the face of demographically empowered demand is always a formula for rapid price appreciation (CA in 1970's). What goes up must come down? Yes. But a 20% per annuim rise for 5 years, followed by 5 years of stagnation or a 10% loss, is still 5%+ annual growth rate (worse case). If leveraged at 90%, the return on initial investment is still 44% per year. The hard part is making sure the best years are in the beginning... even hard is selling at a peak. www.vacation-finance.com

About the author:

bwaun@vacation-finance.com

Bob Waun is the CEO of Vacation Finance, America's First Second Home Lender. As a VP at Paramount Bank, and while at Wells Fargo, Bob innovated lending for Condo Hotel projects. He holds a Master's degree in finance/economics and BBA in finance from Walsh College and a MI Real Estate Broker's License. He has personally lent over $600+ million in residential loans, and over seen operations lending $1+billion. He has be