By 2030, all baby boomers, those who were born between 1946 and 1964, will be 65 years and older. The Great Wealth Transfer is already well underway as an estimated 73 million baby boomers age into retirement, transferring up to $59 trillion of wealth to the next generations through inheritances and assets like real estate. A wealth transfer of this size and scale will have big impacts on the real estate market over the next 10 to 25 years. Here's what investors need to know.
Shift in supply and demand
Wealth transfers typically happen upon circumstantial events, such as death or incapacitation, not necessarily retirement. Retirement is simply the point in time when many start to live off their investments, savings, and assets while planning and preparing for the last years of their life.
For baby boomers, this time can include estate planning to reduce the tax burden for heirs, simplifying or reducing their real estate portfolio, or preparing for care in their elder years, which could be in-home or other senior housing solutions. All of these directly impact the real estate market now and in the future by shifting the supply and demand of certain assets.
It's estimated baby boomers hold $6 trillion worth of real estate equity today. While many are choosing to age at home, eventually this generation will pass on or need full-time care requiring them to move into a senior living facility. This transition will likely create an increase in the supply of single-family homes while creating an increase in demand for senior housing, such as assisted living or nursing homes over the next 10 to 20 years.
From 2016 through 2026, Fannie Mae's housing insights predict the number of single-family homes for sale to be between 10.5 and 11.9 million. The hope is that this steady increase in supply will help balance out the drastically low supply in the marketplace today.
Gen X and millennials are set to inherit millions of dollars
Those on the receiving end of this transfer might want the property to keep as a primary or secondary residence or for short- or long-term rental income, but many times the heirs simply sell it. Considering the average home is appreciating 9% per year, this could be a tremendous opportunity for those who inherit a home to profit from their parents' or grandparents' equity.
Buying a home in probate is a popular market for distressed-property real estate investors, often targeting out-of-state heirs or multiple heirs because of the challenges inheriting a home within these contexts can bring. This means investors could see an uptick in probate deals over the next few decades.
However, the most important aspect of the wealth transfer as a whole for baby boomers, Gen X, and millennials is the tax burden and estate planning involved in making the transfer as easy and inexpensive as possible. Those entering or already in retirement should have a plan for what happens next, especially if they own real estate.
Heirs who inherit money or a home without proper plans in place could be subject to hefty inheritance taxes. There is a lot of discussion about the growing wealth gap between baby boomers and millennials in particular, but this great wealth transfer is a huge part of what can and very likely will help bridge that gap moving forward. Inheriting money or property can be a crucial stepping stone to getting ahead, especially in a challenging economy or housing market.