Are We Overbuilding Senior Housing?

This article in the Wall Street Journal (GO HERE) got me thinking about a number of things senior related. While housing is the most important – where, how much, equity, etc. – a number of other issues also come into mind, such as health, mobility, travel, and family. The focus on the WSJ article was on the businesses building housing for the older and more challenged seniors – most of whom are NOT baby boomers.

Senior assisted living properties coming on to the market today serve residents that are at least 75 years old and older. The first Boomers are now 69ish and even though maybe 10,000 of us do turn 65 each day is the magic number is age 66. I know there’s Medicare but it’s the SS check that really counts. And THAT is the problem: managing assets, health, properties, time, bucket lists, and family. So the issue of senior assisted living for most Boomers is irrelevant – and too soon. Now the businesses that are building these facilities need to be careful, true; but they will be ready (and if they survive) for the real press and need in about fifteen years.

The issue that I see confronting most of us in the over 65 crowd (and those soon to join us) is time, health, and equity. There are hundreds of experts out there willing to share their opinions on how to stretch your savings until your last breath—pleasant thought, eh? Nevertheless, it’s true, many of us have been successful in life, done right by ourselves and for their families and want, while still healthy, to climb to the top of the Duomo in Florence, see Antarctica, do a photo shoot in Africa or Alaska. And most want to see their grandkids get married – something that today is a far greater chance than ever. We are healthier, richer, and often, wiser.

The senior housing (assisted, resort, second home) market is incredibly diverse. By far the majority of Boomers will age in place. Their home is literally their castle. They will stay until they can’t or won’t take care of it. That will be a wrenching moment, we have all been there, or will be, with our own parents when they/we are forced to find other housing. The difficulty of planning for that day is hard. Too many variables, too much emotion, and too much history. But we get through it and more often than not, end up better in the end.

The most critical issue is the equity in our properties—how do you cash it out and use it to live. Sure Social Security is there, but hardly enough to travel on and maintain the life you’ve grown accustomed to. So we look to our savings (equities, bonds, and assets) and how to meter their returns and their decline. Should we sell the home? And when? Should we reverse mortgage (and how do you really do that?)? What are our renting options? And where? Too many options—and so much time.

Stay tuned . . . . . . .

When I Get Older, Losing My Hair . . . .

When I'm Sixty-four!

Baby boomers are facing a big, and I mean very big, problem during the next thirty years: a serious lack of housing. When we reach a certain age we tend to have difficulties with the usual issues of home maintenance and care. We all have to face the fact that we just can’t do a lot of the things we liked to do once upon a time. And now we're looking at the clock a lot more and the bucket list and the whole issue of stairs and darker rooms, and seeing the buttons of the remote, and your kids saying things like, "Why do you have the TV so loud?"

To most of us the biggest issues are health, mobility, safety, and money. The usual course for most of us is to age in place, assuming that stairs are not a problem, you can afford trustworthy in-house health professionals, maybe a maid or a cook, and once in a while a chauffeur. Most of us aren't blessed this way and the kids have their own families to deal with. And besides, your preference isn’t to have them take care of you anyway.

More than fifty years ago Del Web built the first of the Sun City retirement communities, they became the model on which hundreds of other like communities and senior/active adult villages were built. Due to changes in the federal laws which allowed legalized discrimination based on age, these communities have continued to age, like boomers, in place. Many of these communities are now old and dated, the houses show the wear and tear of time and the facilities are too costly to maintain. And the new recruits – the Boomers - are now looking for something different.

By 2050 the number of Americans over the age of 65 will double from 40 million to more than 80 million. This age group is now about one in eight; in 35 years it will be one in five. Every year more people live to past 85 and there are more over the age of one hundred than anytime in our history. Other countries, such as Japan, are even worse.

Where will you live when you "retire?" In your current home? In a high-end retirement community? In a subsidized senior housing project? With you kids? There will be serious consequences to your family, your finances, your health, if you make the wrong choice. The biggest problems, right now, are the lack of choices with respect to housing – the retiree's biggest cost. It will soon become a buyers market, those with money will determine the market.

Believe it or not, one positive out of all this is that if significant numbers of homes and apartments can be built for this Boomer market, large numbers of existing homes become available to the marketplace. This is definitely a trickle-up scenario. Each year millions of Boomer residents will sell and move – freeing up housing. The problem right now is where can they buy/rent/co-own and move?

The over 65 market is growing and their need for housing is growing. The opportunities are huge but the development community is slow to the table. This housing model is different; the Boomer customer is more demanding, is better educated, more experienced, and is wealthier. It's a market not understood to many in publicly traded development companies. We all need a place to be happy and grow old and our expectations are not currently being met by the marketplace. And besides not everyone wants to move to Florida or Arizona.

This niche of housing requires land near population centers, high quality construction, facilities, recreation, and above all experienced management. It also requires new financing/cost models that allow this market to protect their equity and preserve their dignity. This cadre's biggest fear is that they will have more years left than money. Development companies that can create quality projects with long term guaranteed benefits and security will be the winners. City and towns will have to find ways of adjusting their fee structures, zoning and approval procedures to help move the project forward. We will need millions of these units over the next ten years and they need to be started now.

Stay Tuned . . . . . . .

Can Housing Find A New Home?

The single family housing market is expected to build 22% of the number of homes they built in 2005, which was 1.3 million. Whether they will even sell that many houses remains to be seen. The national public builder’s share values are off over 20%. KB Home is off over 50% since the first of the year. Most of the mergers have taken place, all the layoffs have been made, and soon even the feds won’t be there to help (thanks, it’s like your dad continuing your allowance when he’s unemployed).

Insanity is to continue doing the wrong thing over and over hoping that at some point you will get it right.

Builders continue:

• to buy land hoping that the market will catch up,
• to reduce the sizes of the house they build cheapening them until they are worthless,
• “right size” to the market (whatever that means),
• change their stripes from single family to condos,
• cooperate with the feds over their questionable lending practices and lose even more cash due to fines,
• to burn cash - cash they don’t have.

I’m not one to tell a company how to run thier business, lord knows the business of businesses is a murky alley with many foul and onerous and odorous things hanging about the darker edges. And today the one business I wouldn’t start is a home building company. Very high entry (land), high costs (construction materials), and a questionable market (reminds me of the nascent electric car industry – don’t get me started). The one good thing it has is the number of available and experienced out-of-work employees.

To be sure the marketplace is there and every minute grows by more and more people. They want a place to live. This need is not being met at the moment. Yes, the media makes an issue about the homeless and the unemployed; they are easy faces to find for the camera. What they don’t show are the kids living in their parent’s home, after college, married, with children. The families doubled up in apartments. The empty homes and apartments frozen out of the market by rental laws. The people living in their boats as pointed out in a newspaper article this week.

I would suggest a few strategies for home builders that want to stay in the market.

• Be flexible, look at the rental market, build single family homes FOR the rental market.
• You know how to build, build apartments.
• Hold these rental properties on short term leases, learn how to rent to own. Don’t leave it to others to pick up your mess and make money on it after you are gone.
• Remember that the market is a cruel mistress that must be obeyed. Explore smaller neighborhood infills where there is growth in specific industries.

Examples:

Throughout the Marcellus shale region of the eastern US small towns are beginning to quickly grow due to the exploding gas and fracking industry. I will bet you they are suffering from a lack of housing, even if it’s twenty or thirty homes. Track the gas producers, look for the potential. These are literally in our own backyards.

        College campuses are facing severe housing shortages. Build homes for this market, rental or even develop residential for sale products that allows multiple students to share ownership and grow equity (they can ask their parents what that means, they might remember) while they attend school.

        Locate, design and build high-end Boomer villages in suburban neighborhoods. Focus on the detached single family house, fully and highly amenitized, for those that kept their investments during the last five years and even flourished.

The shakeouts and the last man standing rule will continue to roil the builders. There are hundreds of brilliant men and women out there running their companies well, some will survive. But will they be in the right position when this game of musical chairs finally stops? Me, I would listen closely to the tunes being played.

Stay tuned . . . .

Noodling Housing and Economists

Nood-ling (nōōd’lĭng) n. 1. Fishing for catfish using only bare hands, practiced primarily by crazy people who cannot afford proper fishing gear. 2. The intentional annoyance by bloggers who are skeptical of the news as it’s reported, as in “Noodling bureaucrats is more fun than fishing bare hand for catfish and a lot more surprising.” This is now an end of the month feature.

Megan McArdle in a brief article arlier this week in The Atlantic Home asks the question, “Are There Too Many Homes in America?” She goes on to say that the issue is not that too many homes, there is, at the moment, not enough buyers. As I have argued in earlier blogs, we are silently developing an extreme shortage in housing units especially when considered against an almost invisible and growing household formation curve. Potential buyers are living at home, renting, sharing, etc. and the housing supply is not meeting any level of a projected demand. As with any product when a tipping point is reached, such as an expected increased demand spike (see the years 1946-1956), bubbles can grow.

Brendan Lowney, macroeconomist with Forest Economic Advisors, said a week ago that there is an oversupply of about 2.5 million homes on the market. This is putting downward pressure on home prices as well as consumer demand. Well, duh! I do ask, and argue though, how can the housing oversupply put pressure on consumer demand. The only pressure I can see would be on prices and that would result in a good result for the consumer. The real issues are the retreat of the buyer from the marketplace (fear), their inability to find a loan (acceptance), and unemployment (qualification). These three factors must be overcome to restart the housing engine.

I have been and will continue to be a firm believer in demographics. Simply put, I believe that people will: 1)continue to be people and have children, 2)grow older and wealthier, 3)tend to want to live where it’s nice. I went to college to come to these conclusions. But since the development industry is more complex than my in-depth knowledge of the human condition, they look at trends, buyer groups, age brackets, and other esoteric issues. The fundamental issue is this: Where is the next customer going to come from? Who are they? and, “How can I meet this consumer and sell them my product? It is, as my economist hero, Lugwig von Mises wrote in Human Action, “The market is supreme.”

My second favorite economists are good friends and fellow associates on many projects; they are Claude and Nina Gruen. Neither has let time push them around, they are still as feisty and irreverent as ever when it comes to the failings of our anointed leaders. They both continue to produce excellent books and studies on the development industry. Claude’s recent Rutgers University imprint is New Urban Development (buy here). It attacks the church of entitlements and points a finger at those that allowed all of the past five years of silliness to happen. It is an economic history course on America’s development past, thorns and roses all.

Nina, on the other hand, has coauthored (with Alan Billingsley of Americas Research) one of the best and most readable essays on the current marketplace in America, titled; Boomers, Echo’s and X’s:Generational and other Structural Shifts and Their Impacts on Future Demand forReal Estate in the Coming Decade.   Nina has forgotten more than most of us have learned about development. I won’t go into the broad study in detail but it does look at the three most dominant generations (i.e. those with the money), listed in the title. She takes a broad cross section through the development industry and teases out interesting details that will be helpful in the coming decade. A caveat that runs through the paper is the development industry’s Prime Directive: “Location, location, location” as always, drives regional markets. I will add just one more word, “and Timing.”

I am also reminded of the old Star Trek Prime Directive, General Order #1 of the United Federation of Planets. “There can be no interference with the internal development of alien civilizations, consistent with the historical real world concept of Westphalian sovereignty.” Oh, if only the tweakers, meddlers, and diddlers in Washington (that includes politicians and industry wonks and lobbyists), understood this directive and allowed the marketplace to be truly free.

Stay tuned . . . .