Monday, January 26, 2004

A housing boom, led by boomers

As a generation shops for retirement homes, the US building industry thrives

By Ron Scherer | Staff writer of The Christian Science Monitor

NEW YORK - This spring, Cyndi Gruber is planning a trip to Asheville, N.C., a city she thinks she might retire to when she leaves her job as director of alumni relations at Mt. Sinai Hospital in New York.

"If we like what we see, we'll be back in the fall to really get to know it," she says.

Ms. Gruber is not alone. The baby-boomer generation - estimated at 76 million - is just starting to retire. Like Gruber, they are out shopping for new homes, often not in the cities where they currently live.

And now economists believe this demographic trend may be one of the forces driving the US housing market.

"As baby boomers are leaving the labor force, or preparing to leave the labor force, they are lining up their second home/retirement home," says Kathleen Camilli, an economist at Credit Suisse Asset Management in New York. "Don't be surprised by a stronger than average US housing sector in this decade." Even more immediately, she adds, "The strength in this sector could cause stronger than expected GDP growth this year."

It could be an important boost for the economy. Housing and autos are still two of the main drivers of economic activity, marked by large multiplier effects that provide jobs and work for other industries that supply them. Retirees moving into new houses buy carpets, drapes, television sets, dishwashers, and refrigerators.

In Fort Lauderdale, for example, Richard Zipes, who is building Las Olas River House, a $200 million residential condo complex, says that on average new residents spend $200,000 to $300,000 per unit on everything from new furniture to sound systems - "most of which will be spent primarily in the local area," he says.

Home buying will become even more pronounced by the end of the decade as an increasing number of boomers retire, says Michael Carliner, an economist at the National Association of Home Builders. Since baby boomers have had such a profound effect on everything from the stock market to the types of automobiles driven, he has no doubt the same will be true of housing. "The boomers have dictated what is in excess demand," he says.

Already, some developers can attest to this demand. Mitchell Hochberg, the CEO of Spectrum Communities, a suburban real estate developer, says he is currently building maintenance-free active adult communities for people "55 and better" in Eastport, Long Island, and Monroe, N.J.

In eighteen months, he sold over 100 of the 396 homes in New Jersey - before any of the models were even built. He anticipates the same on Long Island, where last week some 1,200 people signed up to see floor plans. "If we could find the land in this area for another 25 projects, we would be doing them," he says.

While some seniors search for retirement communities in faraway cities, others prefer to live closer to home - near their families, the stores they are accustomed to, and their friends.

That's the case in Chicago, where the Senior Lifestyle Corporation is building retirement communities called "Autumn Green." It's designed for middle-market individuals who don't qualify for government-assisted senior living but can't afford luxury units. "People say, 'I live my whole life here. I'd rather be around my grand-kids and friends,'" says Bill Kaplan, chairman of the company.

Unlike in past decades, today's retirement communities are not just scaled-down housing. "In the past when our parents cashed out, they downsized. Now these new homes are stupendous," says Paul Purcell, a principal in Braddock & Purcell, residential advisers in New York.

In fact, this trend toward larger retirement houses prompted the Cottage Company to build clusters of bungalow-style homes in the Pacific Northwest that sell for between $350,000 and $380,000. "This is not a lesson in austerity and sacrifice,"says Linda Pruitt, a principal. [Editor's note: The original version misstated the company's full name.]

And, many developers now realize that retirees want more than just shuffleboard. Mr. Kaplan's company is also building a high-end community called "Mangrove Bay" in Jupiter, Fla. He says it has top-of-the-line fitness equipment, a spa, and a restaurant-style dining room. The new Spectrum developments will have concierges, an assortment of classes, and walking trails. Hochberg compares it to living on a cruise ship.

In fact, the amenities, like the retirees, are becoming increasingly sophisticated. Craig Bouck, a principal in the Denver architectural firm Barker Rinker Seacat, says some retirement communities are interested in climbing walls and wireless computer transmissions. And, the obligatory swimming pool is also undergoing a face lift. "They want specialized warm water areas," he explains. "Where they can do aqua aerobics or crank down the volume and do resistance walking."

And, the new pools, says Mr. Bouck, are likely to have ramps that allow a "gracious" entry to a place that is also a social meeting place. "This whole idea of planning for these baby boomers has hit forward thinkers hard."

This is just fine with Ms. Gruber, who is looking forward to having time to work with her stained glass. "I want an active retirement," she says. "It's very exciting."

Monday, January 05, 2004

The Housing Bubble in New England

By Dean Baker
In the last eight and a half years, the country has experienced an unprecedented run-up in home prices. Over this time, the rise in home sale prices has been more than 40 percentage points higher than the overall rate of inflation. Typically home prices have risen approximately in step with the overall rate of inflation. Neither the great boom of the sixties, nor the demographic surge created by the baby boomers forming their own households in the seventies and eighties, led to any substantial increase in home prices, adjusting for overall inflation.

The New England region has been at the center of this run-up in home prices, experiencing an increase in home sale prices that exceeded the overall rate of inflation by more than 70 percentage points over this period. The run-up in home prices in New England over this period was more rapid than in any other region of the nation. The table below shows the increase in home prices (adjusted for the overall rate of inflation) in the United States as a whole, the New England region, the Pacific Coast region (which had the second largest run-up in prices), and each of the six New England States.

Table 1

Inflation Adjusted Increase in Home Prices 1995-2003

United States


New England


Pacific States








New Hampshire


Rhode Island




Source: Office of Federal Housing Enterprise Oversight and Bureau of Labor Statistics.[2]

While the most obvious explanation for this increase in home prices is that it is due to a real estate bubble that paralleled the stock bubble – as happened in Japan -- some analysts have attributed this run-up in home prices to fundamental factors affecting the supply and demand for housing. This list of factors includes:

1) an increasing population due to immigration,

2) limited supplies of urban land,

3) environmental restrictions on building,

4) growing incomes of homebuyers.

The problem with these explanations is that none of them are new to this period – if these factors explain the current run-up in home prices, then they should have also led to rising real home prices in prior decades, when many of the factors (e.g. rising incomes) would have played a larger role in pushing up home prices.

At a more basic level, if these fundamentals were to explain a run-up in home prices, then they should also be driving up rental prices. If higher home prices are due to an insufficient supply of housing, then the effects in the sale and rental market should be comparable. While rents did originally outpace overall inflation in the period from 1995-2002, they did not rise anywhere near as much as home prices, increasing approximately 10 percentage points more than the overall rate of inflation. More recently, rental inflation has slowed. In the last year and a half rents nationwide have risen slightly less than the overall rate of inflation. In some bubble markets, such as San Francisco and Seattle, rents are actually falling. This pattern is completely inconsistent with a run-up in home prices that is driven by fundamental factors, rather than by a speculative bubble.

If the run-up in home prices in New England and elsewhere is attributable to a speculative bubble, then it will inevitably burst. Like the stock market crash, a collapse of the housing bubble is likely to be a serious blow to the economy. It will virtually ensure a second dip to the recession. It is also likely to be devastating to the personal finances of millions of families, whose home is their largest financial asset.

Unfortunately, few families realize that much of the wealth in their homes could disappear in a collapse of the housing bubble. As was the case with the stock bubble, the vast majority of economic analysts have failed to recognize the housing bubble. Families have been encouraged to treat housing as a secure investment that can only appreciate in value. This view from experts has led homeowners to borrow in record amounts – the ratio of equity to value is at a post-war low among homeowners, in spite of the record appreciation in home prices.[3]

If home prices move back toward their pre-bubble levels, many families will find that their mortgages equal or exceed the market value of their home, leaving them with no equity. For aging baby boomers who are nearing retirement, many of whom have recently lost much of their savings in the stock market crash, such a blow may destroy any hopes of a financially secure retirement.

While some of the increase in home prices is likely to be real – just as some “new economy” stocks have survived the crash, it is likely that the regions experiencing the largest run-up in home prices will see the largest fall during the crash. For this reason the New England region is especially vulnerable to a downturn in the housing market.

Table 2 shows the real increase in home sale prices over the last five years in the major metropolitan areas in the New England region. The last row shows the real increase in rent in the Boston metropolitan area, the only metropolitan area in the region for which the Bureau of Labor Statistics publishes a rent index. As can be seen, the real increase in home prices vastly exceeds the increase in rents in Boston in every city on the list. As is the case nationally, the rate of increase in rental prices has slowed dramatically in the Boston area. Over the last year, rent in the Boston area has increased by 3.6 percent, compared to increases of more than 7 percent in the prior two years. This pattern of slowing rental inflation is consistent with the run-up in home prices being explained by a speculative bubble instead of underlying factors in the regional housing market.

Table 2

Inflation Adjusted Increase in Home Prices 1998-2003

Barnstable-Yarmouth, MA


Boston, MA-NH


Bridgeport, CT


Brockton, MA


Burlington, VT




Fitchburg-Leominster, MA


Hartford, CT


Lawrence, MA-NH


Lowell, MA-NH


Manchester, NH


Nashua, NH


New Haven-Meriden, CT


New London-Norwich, CT-RI


Portland, ME


Portsmouth-Rochester, NH-ME


Providence-Fall River Warwick, RI-MA




Waterbury, CT


Worcester, MA-CT


Boston – Rent Index


Source: Office of Federal Housing Enterprise Oversight and Bureau of Labor Statistics.[4]

The public should be calling on presidential candidates to address the issue of the housing bubble. The failure to recognize the stock market bubble was the major cause of the current recession and the resulting job losses. While it may be too late to prevent a sharp decline in house prices, the next president should be prepared to offer a program of economic stimulus to counter-act the recessionary effects of the bursting of the housing bubble.

[1] Dean Baker is the co-director of the Center for Economic and Policy Research.

[2] This table uses the OFHEO House Price Index (HPI) data for home prices for the regions and states listed over the period from the first quarter of 1995 to third quarter of 2003. The data is deflated by the non-shelter index from consumer price index. These numbers almost certainly understate the actual increase in home prices, because the HPI only included homes with mortgages of less than $320,000. This would exclude the upper segment of this market, which probably experienced the most rapid run-up in home prices.

[3] At the end of the second quarter, the ratio of equity to value stood at just 54.3 percent (Federal Reserve Board, Flow of Funds Accounts, table B.100, line 52). This compares to an average of close to 70 percent in the sixties, seventies, and eighties.

[4] This table uses the OFHEO House Price Index (HPI) data for home prices for the regions and states listed over the period from the third quarter of 1998 to the third quarter of 2003. The data is deflated by the non-shelter index from consumer price index.