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Dispelling Boomers' Real Estate Illusion

By Jane Bryant Quinn
Sunday, January 21 1996; Page H02

If you're a homeowner, I hope you love your house. For another 20 years or more, your property will shower you with psychic rewards but probably not a lot of financial rewards. As baby boomers plan for the future, they'll have to take a hardheaded view of how much home equity they'll have and when they might want to sell the house that they occupied during their working years.

Too many homeowners "have their brains locked in 1978," says John Reed, editor of the Real Estate Investor's Monthly in Danville, Calif. In the late 1970s and early 1980s, house prices soared as the boomer generation set up housekeeping and competed for suitable homes. "Now they're standing by with their teeth gritted, waiting for '78 to come back," Reed said, "and it's not going to happen."

To investors who follow the stock market, pessimism makes no sense. Stock prices always bounce back after slumps and go on to new highs (at least they have in modern times).

But real estate doesn't work that way, partly because it's tied to demographic change. Take the boomers, for example. The same people who once helped drive house prices up are now the wet blanket holding them down. They own a huge inventory of homes. These houses will come on the market over the next 20 years, and there aren't a lot of people to buy at the high prices boomers think they deserve.

Among the trends that will work against zippy real estate appreciation:

Health: The first wave of boomers hit 50 this year and probably think that they have many years of earnings ahead. For the majority, that's true. But some people will find that their bodies suddenly give out.

Early disability is more common than you think. According to Census Bureau statistics, Reed said, 12 percent of the people 45 to 54 are work disabled, and 22 percent of the people 55 to 64. Without sufficient earnings or disability insurance, they may be forced to sell their homes.

Layoffs: Corporate America's downsizing isn't over yet, and the older you get the greater your chance of getting hit. Early retirees usually get a small cash hoard when they walk away. But that cash is best saved for the extra years of retirement that lie ahead.

Young retirees manage best by living on their pension, a spouse's earnings or earnings from a retirement job. But that may not be enough to handle the mortgage you have now. People with big mortgages but no job generally have to sell their homes, Reed said. If they wait too long and sell under pressure, they might have to take 15 percent less than market price, he said.

Refinancing: You may have refinanced your mortgage in the past two years, as interest rates declined. If you took a new 15-year loan you still have a chance of getting your home paid off before your paychecks end. But if you took a 30-year loan, you'll find it harder to cover expenses as you age.

Timely retirement: Boomers passing 60, and retiring with a pension and Social Security check, still may not have enough to keep up their pre-retirement style. They'll probably sell their houses and move somewhere cheaper.

Bottom line: Family homes can be expected to hit the market in huge numbers, in the years immediately ahead. Northern homes, in particular, might slump, and southern condominiums may boom as this heavyweight generation takes its turn in the sun.

Who will buy all these houses coming to market? Behind the boomers comes the group known as the "baby bust," the first generation in our history to be smaller than the one before. In total numbers, this group is large, but it's the sudden drop-off that counts. Every year, there are fewer 21-year-olds, which translates into fewer people to rent apartments and buy homes.

There will always be local housing booms, as in Atlanta, in preparation for the summer Olympics. The Midwest is doing well right now; next best is the South. Even 4 percent price inflation gives you a reasonable return on a 20 percent down payment, said Anthony Downs of the Brookings Institution. But it's not a home run.

Some boomers may want to sell early, to avoid the rush. Give up the big house, move to something smaller and keep track of the kids by e-mail. Vacation communities may attract a lot of interest. Workers might move in, telecommute for awhile, then retire in place. None of this presupposes a real estate crash. But average home values look weak for as far as the mind can see.

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