THE REAL ESTATE GENERATION GAP

Bill McInerney had a million-dollar house, and he hated it. The 1½-acre lot that constantly needed raking and mowing and shoveling, the multiple bedrooms and big kitchen that were too much for one person, the half-hour commute from Dedham to downtown Boston – none of it suited him. He didn’t even like the quiet. “I’m a city boy,” he says. “I want to hear cars and fire trucks and ambulances.” So a little more than a year ago, approaching his 60s and rattling around the halls alone, he started thinking small. McInerney found a one-bedroom apartment in Brookline under the shadow of the Citgo sign, a “lower end” place in the high $300,000s that he nonetheless loved for its location, with “13 restaurants and the streetcar right across the street.” He sold his white elephant in Dedham to a family of seven for a little under a million, “just as the real estate market started to go down the tubes.” He never wants to live in a big house again, he says, and he doesn’t miss his old one either.

He may be lucky he sold when he did. The 57-year-old is at the older end of the baby boom generation, which is now between 42 and 61. Most boomers will partially or fully retire in the next two decades, and as their lifestyle slows down, so will their desire for the huge houses the wealthier of them have been snapping up in the past few years. Many will have the same idea as McInerney – to unload those houses – which means the number of McMansions for sale is about to get super-sized.

But who’s going to buy? Generation X, a.k.a. the baby bust, is largely uninterested in sprawling suburban homes. And there aren’t nearly as many Xers as there are boomers. There just won’t be enough potential buyers unless the Xers and the older members of Generation Y are joined by a flood of new immigrants who both want the boomers’ houses and are able to pay for them. If that doesn’t happen, prices at the high end will sink.

This is “a godsend” for those in that small group of future buyers, says Harvard University economist Ed Glaeser. Across the country, they’ll be able to snatch up big houses for relative steals compared with what they’d pay today. But boomers who are counting on cashing in their real estate to fund their retirement may be in trouble, because their houses almost certainly won’t fetch their current prices. And those in the Northeast may be in for a double whammy: Compared with the rest of the country, the region has both more boomers looking to move out and fewer new immigrants who might take their places. The baby boom gave Boston, and the rest of the country, its real estate boom. Is the baby bust about to give us the real estate bust?

The boomers’ and busters’ influence on the housing market has never been easy to predict. In 1989, economists Greg Mankiw and David Weil, then both at Harvard University, took a stab at it. As the baby busters were entering the market, they wrote in a widely read paper that “housing demand will grow more slowly in the 1990s than in any time in the past 40 years . . . [and] housing prices will fall substantially over the next two decades.” Wellesley College economist Karl Case jokingly calls this “one of the worst forecasts in the history of mankind.” Anyone who’s read a newspaper in the past 20 years knows he’s only slightly exaggerating. The median price for a house in Boston dropped last year to $515,500, but compare that with 1990, when the median price was $159,000. There are two reasons Mankiw and Weil turned out to be so off-target, says Case. One is that immigrants took up some of the slack, adding to the population numbers, buying houses, and keeping the market healthy. The other is that the boomers weren’t quite dead yet. Mankiw and Weis didn’t foresee the trend of “trading up” that the generation would fuel, nor did they predict the group’s continuing enthusiasm for second and third homes. Ultimately, the baby boomers were such active real estate buyers that they sent prices spiraling up, not down. “Mankiw and Weil missed something that demographers are really sensitive to,” says Dowell Myers, a demographer at the University of Southern California in Los Angeles and the author of the new book Immigrants and Boomers: Forging a New Social Contract for the Future of America. “It’s a classic mistake.”

It’s not one the forecasters will be making again. This time, says Dan O’Connell, Massachusetts’s secretary of housing and economic development, “the demographics cannot be denied.” There are 78 million baby boomers in the United States, and 80 percent of them are homeowners. James Chung, a Belmont-based strategy consultant who studies generational values and trends, says they drove up prices in the most recent real estate boom by sheer dint of those numbers. “There are a lot of builders and developers who got fat and happy by serving the boomers, and they didn’t realize it was just because the market was 30 percent bigger than it was before. They thought it was because they were smart,” Chung says. “There were a lot of consumers who got rich in the housing market. They thought they were really smart, too.”

Many boomers, particularly those in Massachusetts, now have their net worth tied up in their houses. “Anybody who bought a house in a good suburb in this state more than a few years ago is close to being a millionaire because of it,” says Case, who is 60 and includes himself in that group. The house he bought in Wellesley nearly 16 years ago for $392,000 is now worth “clearly a million and probably a little more.” He’s not selling (at least not at the moment), but overall, he says, other boomers in Massachusetts are starting to find it difficult to sell their suburban homes at the prices they’re convinced they deserve. Those with large houses, rather than small split levels or Capes, have the greatest challenge. In some Boston suburbs, those houses are already staying on the market longer than they would have a year or two ago.

It used to be that when boomers sold their houses, they simply exchanged them for even bigger ones. But with retirement looming, that’s no longer the case. Some, like Bill McInerney, are hoping to move to smaller, more easily maintained homes or condos, either in nearby suburbs like Quincy or in downtown urban areas near cultural institutions. (Those who move to the city, however, aren’t downsizing to the point of living like their 25-year-old kids. “By and large,” says Glaeser, “they’re just not ready to move into 1,200-square-foot apartments.”) Retirement communities are also popular. A recent survey by the National Association of Realtors showed that half of boomers said they’d consider the land of shuffleboard and bingo, and most of these residences aren’t your grandma’s old-folks’ home anymore. And some boomers will decamp not just from their homes but from their home regions, following their blue-haired predecessors to Florida, California, or the increasingly popular Carolinas. Myers, the California demographer, is currently gathering national data on aging and home sales, and on this count, he has nothing but bad news for New England. “The elderly in the Northeast are going to be the first to bail out of their houses,” he says. “After a certain age, a lot fewer people want to shovel snow.”

The only place many boomers don’t particularly want to be come retirement, it seems, is where they are, in the homes they already have. Indeed, it may be that they’ll stay put in their current houses only if they can’t manage to sell them. And for some, that’s a distinct possibility.

If every single member of Generation X wanted to buy one of the baby boomers’ 34 million homes, and every single boomer wanted to vacate, all the homes would get sold, with 15 million Gen Xers left over. But the numbers don’t actually work out like that, since most young would-be buyers are coupled up. In reality, there aren’t nearly enough Gen X households to go around – and it’s not a generation that particularly likes the big homes that many boomers have gone for, anyway. Most of today’s young families are small, and they don’t need vast amounts of space, nor do they want it. Chung, who has studied the Xers extensively, says they’re often turned off by suburban manses that are costly to maintain. “The ‘my home is my castle’ thing is less relevant to them,” he says. Generation Y may be relatively more interested in big houses, he adds, but they’re just entering the market now. Most of them won’t be old enough or rich enough to buy the boomers’ homes by the time there’s a glut on the market.

If Gen X can’t buy all the homes and Gen Y can’t either, who else is there? At the moment, no one. That’s why the hopes of many economists are riding on a future influx of immigrants. Political debate often focuses on immigrants “taking” the jobs of the native-born, but in this case, they’ll be coming to their rescue. Immigrants are already starting to make their presence known on the real estate market, says Case: “If you talk to brokers, and you ask them what’s different now from 10 years ago, they say they can’t pronounce the names of a lot of the buyers anymore.” At least 33 million immigrants now live in the United States, and there may be many more. But even factoring in illegal aliens (estimates of illegal immigrants are notoriously unreliable, but they range from 7 million to 20 million), the numbers in the future will be “a drop in the bucket when it comes to replacing the baby boomers,” says Chung. Remember, there are 78 million baby boomers nationwide.

The picture in Massachusetts is especially bleak. Population growth is stagnant, and unlike Western and Southern states, Chung says, “we’re just not a magnet” for Spanish-speaking immigrants. China and India send a steady stream of graduate students to the Boston area’s colleges, but that’s not a force we can count on in the future. “There simply aren’t enough Asians to go around,” says Myers. “All you have to do is remind people what the birthrate is in Asia – their migration is just not going to be increasing that much.” Add post-9/11 work restrictions that have made it more difficult for foreign professionals to become permanent residents here, says O’Connell, and there’s very little chance that the pool of new immigrants will be big enough to keep boomer homes at the prices they’re at now. Some policies currently being mulled – such as tightening the borders and deporting the illegal immigrants who are already here – could make the situation worse.

Even if the numbers of warm bodies were more encouraging, the other immigration numbers would still be grim. Immigrants don’t readily buy homes in America. It’s not that they don’t want to – for many of them, a home is a symbol that they have “made it” (and, in that sense, they’re more like the boomers than Generation Xers are). But more than 60 percent of the immigrant households who have arrived in the United States since 1980 are still renting. When they do buy, says Judy Moses, an independent realtor who covers Jamaica Plain, Brookline, Newton, and Chestnut Hill, it’s modestly priced and sized homes – “not these big houses the boomers are selling.”

The reasons that the foreign-born won’t buy the big houses vary, but they come down to two main ones: cultural ideals among wealthy immigrants and sheer economic impossibility among poorer immigrants. “When people say ‘immigrants,’ it’s really two populations,” says John Pitkin, a demographics consultant based in Cambridge. “You’ve got highly educated, high-income folks. Then you’ve got greater numbers of people who have a fair amount of education but, because of the language barrier, they’re stuck, say, delivering newspapers or doing other jobs they never would have had to do in their home countries.”

Massachusetts has both groups, and neither is a good match for the big cookie-cutter homes that have sprouted up in the suburbs in the past 20 years. In the first group are many East Asian immigrants, who “arrive with a lot of money,” says Myers, but won’t be clamoring for what he calls “hand-me-down housing.” As a rule, he says, “first-generation Asian immigrants like it clean; they want to be able to take their shoes off at the door, and they don’t want dirt and dust and dog hair in the house. The way most boomers live is disgusting to them.” That’s good news for the construction industry – more new McMansions! – but it does nothing to address the glut of old ones. As for the second group, the million-dollar home isn’t unappealing; it’s impossible. Those immigrants instead will put pressure on the same portions of the market they always have: the cheap housing. The bottom end of the market will be strong, Myers says, but the top will collapse.

Perversely, then, most large groups of buyers in the near future – Generation X, new middle-class immigrants, downsizing boomers – will be looking for the same thing: a nice little place at a nice little price. There aren’t many of those around. Once everyone wants one of these places, the nice little price will inevitably rise until it’s not so nice anymore. In a way, this might help the boomers who want to sell big houses; as prices go up in the middle, they’ll lift the whole market, and those prices at the top will get a boost – but only a small one. “People won’t be able to pay a million bucks anymore,” says Myers. “They’ll be fighting at $800,000 instead.” There won’t be a marketwide bust in Boston, but prices for the top end, at least, won’t look like they do today.

If there’s no way to save those boomer houses (and thus those boomer retirement funds), is there at least some way to make sure that prices for the smaller homes don’t go skyrocketing past the means of the middle class? “What we really need [more of] is three-bedroom, 1½-bath homes, the kind that were built for the returning vets after World War II,” says O’Connell. Here, then, is a possible future role for the home builders who are starting to see the market for “faux chateaux” evaporate: They could redirect their efforts into building more modest homes.

There’s just one problem, adds O’Connell: “Those homes are the most difficult to build, because the community doesn’t want them.” Wealthy homeowners who fund local school districts with their property taxes usually don’t want to open their neighborhoods to lower-income parents, who would reap the benefits of good schools while paying comparatively less for them in taxes. “Nobody,” says O’Connell, “wants to educate those kids.” In the long run, though, says Myers, opening up might be the only viable long-term strategy that could save the big houses. Better-educated kids grow up to be richer (read: home-buying) adults. In his new book, Myers writes that by paying for public education now, the rich can create a more prosperous class of home buyers for the future. So far, though, he says, “they don’t get it, even if it is in their best interest.”

What other choice do the boomers have, except to save themselves? They can’t stay in the workforce, or in their castles, forever. But maybe they’ll surprise us all again, as they surprised Mankiw and Weil, and remain a vital part of the housing market for the next 20 years. They may well put off retiring, at least, which means they’ll stay active. In the recent National Association of Realtors survey of boomers, respondents reported a median retirement age of 70, and almost a third of them said they figured they’d just keep working until they died. Of course, that’s not necessarily because they wanted their lives to play out that way. Many said they were anxious that they simply wouldn’t have the money to retire, and even more said they were “unsure of their financial future.” Given that no one else is sure about their financial future, either, it’s hard to blame them.