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Thursday, December 03, 2015

McMansions and long term housing appreciation

For years, baby boomers were urged to buy housing. In the long run, it's cheaper than renting, and that was true, and likely is true for most people who are staying in the same place for a long time.

But we also heard housing was a good investment. And, in the current market where I'm at (upscale suburbia), the market is going to toward larger homes, teardowns, what are called McMansions.

http://blogs.wsj.com/briefly/2014/09/30/5-reasons-new-houses-are-still-getting-bigger/

Well-heeled buyers have typically gone for larger, new homes. They haven’t typically been the only portion of the market buying new houses—until recently. “The market has shrunk to a level where a very small segment of buyers is driving what the market looks like,” according to Rose Quint, assistant vice president of survey research at the National Association of Home Builders. “Until there’s a more representative sample of buyers [for new houses], they will continue to dominate how the market looks.”
 So, the current market is being driven by wealthier (generally older) buyers, i.e. by baby boomers. But baby boomers are getting older, and sooner or later will want to sell. And, in general, they will want to sell to the generations below them. These generations are smaller (that's why they call it the baby boom) and more saddled with debt and expenses (student loans, rising health care costs, etc.).

So baby boomers will be able to sell, but there will be more sellers than buyers and the buyers may have less money they can / want to spend on housing. That means prices will be depressed. This is similar to any situation in which there are more sellers than buyers.

This same situation is likely  to occur with stocks.
 When people retire, their income drops much more sharply than their consumption. As a result, they stop saving and start drawing down the assets they’ve acquired during their high-saving years. That could start to put upward pressure on interest rates and downward pressure on stock prices.
But each market is different. Stocks are really an investment decision. If I buy an index fund, I don't really know much about the individual stocks. I just want to try to get a return. And stocks are an international market, so anyone in the world can buy Procter and Gamble stock.

Housing sits in one location, and is subject to taste. What I want out of a house is different than what my children or grandchildren want. So that big suburban McMansion may be out of fashion in 20 years.

So it's best to think of housing as a consumption good.  If you want a big house to enjoy now, enjoy it.  But it's not likely to be a great investment over the long haul. You may not care if that's your heirs problem.