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- Baby boomers are retiring and looking to move into small "starter" homes. They're crashing into a historic housing shortage.
- The US supply of starter homes is the lowest it's been in 50 years, and construction is slowing instead of ramping up.
- The typical boomer just can't afford to outbid wealthy peers, Gen Xers, and millennials in a market where cash is king.
The typical baby boomer just wants to retire and move into a smaller home. It's the kind of "downsizing" that makes sense for really enjoying the golden years of the 60s and onward – and it's especially important as the retirement age is younger than ever after the pandemic.
The problem is a historic shortage of not just housing but of starter homes – exactly what boomers need to meet their downsizing purposes. It's pitting middle-class boomers against their wealthy peers and even millennials with enough cash to snag the few starter homes on the market.
The country's supply of starter homes – properties sized 1,400 square feet or smaller – sits at the lowest level in 50 years. Where starter homes counted for 40% of construction in 1980, they were just 7% of construction in 2019.
That's left the housing market unprepared for the wave of pandemic-era retirements. At least 1.7 million people retired ahead of schedule due to the pandemic, according to The New School's Schwartz Center for Economic Policy Analysis. Put simply, more retired Americans are fighting over a smaller inventory of starter homes.
As Lawrence Yun, chief economist at the National Association of Realtors, told The Wall Street Journal, "young people want to upsize, and the older generation is looking to downsize." He noted that downsizing represented about 28% of transactions in 2020, and most of those involved buyers 55 or older.
However, not all boomers are staying put. Well-off boomers over age 60 are more active in the housing market in the past decade than people in the same age group 10 years older, according to a Zillow report. With more cash in their pockets, boomers are winning bidding wars with the younger generation. That some boomers can't afford to sell and downsize while their peers are snapping up homes with all-cash offers is representative of an intragenerational boomer wealth gap.
Two generations are squeezing starter-home supply
As more Americans look to downsize, they face intense competition with a generation beginning its foray into homeownership. Millennials are in their peak years for household formation and driving a surge in demand for homes. Since they don't already have properties to sell, they're mainly interested in less expensive starter homes.
The shortage is only making the market worse for both generations. Bidding wars have left young Americans struggling to buy their first homes and reap the benefits of rising home values. At the same time, retiring Americans who can't keep up with starter homes' surging prices are staying put in their properties.
It's a concept known as "aging in place," which a New York Times analysis of Federal Reserve data found has become more popular for boomers than past older generations. While some are wary of putting their houses on the market for fear of being unable to find an affordable replacement, they're also cautious of nursing homes in the Covid era.
That's exacerbated the vicious cycle in the housing market. Boomers hold more real-estate wealth than any other generation. By staying in their houses, the group is keeping a huge supply of existing homes from hitting the market and bringing forth much-needed supply. Generation X is unable to move into boomers' homes, and millennials can't move in after them. The age-old housing cycle has seized to a halt.
Those expecting a surge of starter-home construction will probably be disappointed. Estimates of the overall housing shortage range from 3.8 million homes to 6.8 million. Democrats have proposed $150 billion in funding for housing, but the aid would only fill some of the hole. And precedent suggests contractors won't focus on building starter homes. "Upper-tier housing" that costs at least $500,000 made up the bulk of new home construction in 2019, Insider reported.
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