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Underinvestment in Real Estate Might Be the Next Big Hurdle for Investors, According to a New Report | Black Kite Express

A real estate underinvestment crisis may be looming in the coming decades, thanks to baby boomers.

According to a joint study According to Morning Consult and home improvement company Leaf Home, 55% of baby boomers plan to age in their homes over 40 years old and have no intention of selling or renovating them.

That means when millennials inherit homes, they may face a mountain of deferred maintenance that can be costly and lead to potential construction and supply shortages. Meanwhile, own empty nests twice as many large households as millennials with children, contributing to the housing supply crisis throughout the United States

Jon Bostock, CEO of Leaf Home, said in a press release:

“The real estate market is caught in a generational tug of war. Boomers will soon face the obstacles of aging in place, while millennials will face the surprise of having homes in need of major upgrades. With an aging and ignored available housing inventory in the next decade, we may see a crisis that will overwhelm the home improvement industry and put pressure on the budgets of millennial heirs, impacting the housing market. .

What the study says

The study found that many baby boomers live in homes dating from the 1980s or earlier. More than half of respondents said they live in homes that are more than 30 years old, and many said they have never made major renovations nor do they intend to.

Even more concerning is that only 24% are preparing their homes for aging, and even fewer are adding security features.

Percentage of people based on how long they have lived in the house and their plans not to renovate various elements. Home sheet

At the same time, about 81% of baby boomers plan to leave their property to their millennial children when they die, and more than half expect to leave $500,000 or less.

All of this means that millennials could inherit older homes that are in desperate need of renovation.

Meanwhile, many millennials with children are being priced out of larger homes (more than three bedrooms), and 20% of the country’s large homes are owned by empty-nesters, according to real estate firm Redfin. This generational divide has changed in the last decade, with more older Americans owning larger homes than in 2012.

The percentage varies across the US, with baby boomers occupying large homes in major metropolitan areas of the Rust Belt and South, including:

  • Pittsburgh with 32.1%
  • Birmingham, Alabama, with 31.1%
  • Cleveland at 30.8%
  • Buffalo, New York, with 30.5%

Many baby boomers do not have mortgages, meaning they have no incentive to sell. About 54% of baby boomers who own homes have no mortgages, meaning the average monthly cost of owning a home (between insurance and taxes) is just $612, according to Redfin. And for those who do have a mortgage, many have lower interest rates compared to what is offered now.

What this means for investors

There is a massive housing supply shortage in the US. The latest 2020 estimates found a housing supply shortfall of 3.8 million units. While some areas are trying to address the housing gap through build more multifamily housingHigh home prices and rising financing costs in recent years have made it difficult for the average American to afford to buy.

And with baby boomers staying put, the gap in housing supply may not shrink anytime soon, Redfin senior economist Sheharyar Bokhari said in a news release.

“It’s unlikely there will be a rush of large homes hitting the market any time soon,” Bokhari added. “Boomers don’t have much motivation to sell, financial or otherwise. “They generally have low housing costs and most boomers are in their early 60s and still young enough to be able to take care of themselves and their home without help.”

This means that, for real estate investors, there are likely to be fewer homes on the market in the coming decades. But when these homes come on the market, they will be in desperate need of upgrades. And for savvy investors, there may be opportunities to buy fixer-upper homes at a bargain price before fixing them up and selling them for a profit.

But for now, it looks like the housing shortage will continue. “Some boomers are ready to move into a condo or move somewhere new to retire, and the mortgage rate lock-in effect is starting to ease, so while there won’t be a flood of inventory, there will be a trickle.” Bokhari said.

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BiggerPockets Note: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.

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