The End of the American Dream?

October 14, 2009

Much has been written lately regarding the end of the American dream to home ownership.  Earlier this year Harris Interactive on behalf of the National Foundation for Credit Counseling conducting a homeownership survey among 1,001 adults ages 18 plus. 

The results of the survey showed that almost half of all American adults no longer view home ownership as a reliable way to build wealth, 42% no longer own a home and don’t expect to ever own one again and 31% don’t believe they ever will upgrade to another home or buy a vacation home. For many Americans, the long-held goal of owning your own home is no longer feasible or even desirable. Increasingly, Americans prefer to rent, rather than buy.

The same seems to be true for vacation and second home ownership. During the past two decades, many developers sold properties in resort areas to a seemingly endless pool of demand from the Baby Boom generation. While it is true that this generation is the best equipped age group to purchase resort real estate, a recent Consumer Travel Report by PhocusWright, a travel industry market research company, notes that recent economic conditions have impacted what is called the “trailing-edge baby boomers”, those currently of 45 to 54 years of age.  The report states that this segment of the baby boomers is “stuck in a middle-aged slump, … with children in college, devalued homes and ravaged investment portfolios …”.  However, the report goes on to say that,  “while boomers still represent a critically important consumer group, the permanence of their risk-taking and resulting financial scars will change the way this generation spends money for a long time, if not forever.”

In a recent article published by Hospitality Valuation Services entitled Resort Real Estate: Preparing for the Recovery, author Andrew Cohen notes that the resort real estate market more closely follows the timing of the residential real estate market cycle than the Gross Domestic Product (GDP) which most closely correlates to the transient hotel market.  Mr. Cohen notes that the principal driver of demand for resort real estate is wealth.  2007 was the turning point for the wealthiest of American families.  The article quotes information published in the Merrill Lynch Capgemini World Wealth Report 2009, stating that  the number of High Net Worth Individuals (HNWI) in North America declined by 22.8% to approximately 2.5 million individuals in 2008 compared with 2007. Worldwide membership in this elite group dropped by 14.9%, to 8.4 million individuals. The study defines HNWIs as individuals who hold more than $1 million in investable financial assets. The population of Ultra High Net Worth Individuals, with over $30 million each in investable assets, dropped even further, by 24.6% in 2008.  

Even more frightening is a table in the report which details the dramatic decrease in resort real estate volume changes from 2007 to 2008.  Annual Timeshare Sales (United States)  decreased 8% (from $10.6 billion to $9.7 Billion), Fractional Interest Share Sales (North America)  decreased 46% (from $485 Million  to $263 Million, Private Residence Club Sales (North America)  decreased 24% (from $1.2 Billion  to $0.9 Billion, Vacation Homes Sold (United States) decreased 31% (from 740,000  to 512,000) and the Median Vacation Home Price (United States)   fell  23% (from $195,000 to  $150,000).

While these statistics are alarming, many in the industry don’t share these pessimistic views.   In a recent speech at the University of Florida Center for Real Estate Studies’ annual Real Estate Trends and Strategies Conference, David Denslow, a University of Florida research economist predicts better times ahead as the baby boomers retire. He points to retiring baby boomers as a salvation for the Sunshine State. He sees that number fueling state growth for the next 15 years, though he agrees that many boomers must first recoup some of their wealth lost during the recession before they can sell homes and move south.

I’m in the optimistic camp.  People in all socio-economic classes will continue to want home ownership once the recession begins to ease.  Homeownership will once again be part of the American dream and housing prices will continue to rise but at a slower pace than in the past.  The term “besting” or “better nesting” has been coined to describe the period between empty nesting and old age.  I believe this trend will have a major impact on housing strategies, especially resort real estate as the 78 million baby boomers move into their retirement years.

Scott R. Lodde

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