The Great Financial Crisis led to a plethora of vacant single-family homes. It also meant a cut-off in new home supply, especially for entry-level homes. While more homes have come to the market in recent years, there remains a lack of supply.
According to Cotality, analysts have hoped that aging Baby Boomers would sell their homes in what has been dubbed a “Silver Tsunami,” increasing the supply. But this isn’t happening. Instead, Cotality is seeing an increase in “inherited homes,” defined as those owned by “a person who passes away while owning a home, and who passes that home to their heirs,” Cotality Principal Economist Matt Delventhal told Connect CRE.
As a result, “the anticipated ‘Silver Tsunami’ of housing supply will be delayed as seniors age in place and hold on to their historic volume of homes for longer periods,” noted a recent Cotality article written by Delventhal. Those homes are then passed on to heirs.
Inherited Homes and Real Estate Impact
Delventhal explained that inherited homes have acted as a “relatively steady source of supply” that is less impacted by the resale and construction cycles. “Its role has been growing over the past decade or so, mostly because of the large size of the Baby Boomer generation,” he said. “They’re the largest cohort of seniors in U.S. history, ever.”
However, unlike the Silent Generation, which was more likely to leave their homes between ages 65 and 75, Baby Boomers continue to stay put. “Today’s seniors are holding on to their houses longer, effectively freezing the anticipated flow of supply,” the Cotality write-up noted.
There are a few reasons for this trend. First of all, there are more Boomers than there are in the Silent Generation cohort. “People born in 1948 have approximately the same homeownership rate as those born in 1938, but over 50% of babies were born in 1948 than ten years earlier,” Delventhal said. “Extrapolate those over the years of the ‘boom,’ and you have larger numbers.”
Other factors in play include the rising cost of long-term care in a facility—and state-specific rules. For example, California’s passage of Proposition 13 prohibits property tax increases of over 2% per year, no matter the home’s market value. That exemption can be passed on to children and grandchildren on the first $1 million of real estate value, provided that the heirs use the home as their primary residence.
“The proposition tends to disincentivize owners of all ages from selling,” Delventhal added.
The Takeaway and the Look Forward
Delventhal acknowledged that the Cotality report doesn’t analyze whether heirs sell, keep or live in inherited houses. Additionally, not all states have a Proposition 13; tax and inheritance laws differ.
However, Delventhal said he believes Baby Boomers and older Gen-Xers will likely keep their homes and pass them to heirs rather than put them on the market. The aging-in-place trend won’t add supply to the current housing market.
“I think that the potential for an aging population to change housing markets over the next few decades is poorly understood,” he added. “The rising share of inheritance in property transfers is an indicator that the landscape is changing, and I think it needs more study.”
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