Aside from the obvious difficulties of forecasting a largely unknowable future, the real estate market is constantly evolving, making direct price and demand comparisons five to ten years from now difficult at best.  As many commentators have pointed out, it’s patently clear that we’re in the midst of a big demographic shift with the aging baby-boomers massively distorting the demand curve of multiple industries, including housing.

With all our built-in entitlement programs leading to spending and revenue imbalances, fiscal disaster appears inevitable.  But, with the introduction of the much maligned Obamacare, we’re at least looking at trying alternatives, and trying is always better than not trying – ask any professional scientist.  No matter what, tough choices will have to be made, and housing and related home hospice care costs are right in the bull’s eye.

Driven by higher transportation costs, I think the real estate market will look far denser than it is today. Retirees will converge on city centers, since as a society, we are no longer able to afford the luxury of having each senior occupy an expensive single residence out in the suburbs.  A younger generation (Gen Y’s) will fill the newly vacated suburban neighborhoods, stabilizing prices but not driving much demand for new suburban sprawl.

Major cities will start to have skylines resembling New York’s or Vancouver’s, with endless towers of relatively cheap mid-rise, high-density housing being filled by the elderly.  New Yorkers boast of having peekaboo views of the park or the Empire State Building, while they live in urban boxes of non-descript mid-rise buildings.  Meanwhile, Vancouver has areas filled with hundreds of nearly identical towers in an almost blindingly futuristic montage.

Prices on a quality-adjusted basis will rise to reflect this new demand for condo units.  We will likely duplicate their mid-rise buildings and offer studios/efficiencies of a few hundred square feet to the elderly and the masses of modest-income, college-educated buyers.  So, while construction costs are not necessarily cheaper, the lower grade finishes and higher density make each unit affordable.  We’ll be able to provide regular health care monitoring to avoid the high cost of full-time hospice care, a bit like Japan.  Meanwhile, the younger people can stay close to work and use mass transit.

With current new construction hitting record lows, the housing market is efficiently adjusting supply to reflect demand.  Investors are eagerly snatching cheap rental condos up and they will likely be well rewarded.  It’s not pretty, but investors are helping to clear the market and normalize housing.  The key has been to find properties with the right return characteristics as we’re doing for our clients.  At the current furious rate of investor purchases, I’m betting on the market normalizing in 12-18 months, recovery being several years out.  Five year forward, properties closer to city centers will have enjoyed a few years of high single digit to double digit appreciation.  Those farther out, like the once fashionable exurbs, will be stagnant if not down.

As for where we’ll put these mid-rises, there’s still plenty of vacant land for urban infill, at least around downtown San Jose, San Diego and Los Angeles, California’s 3 largest cities.  Change like this won’t happen overnight, but for those who pay attention, we’ll definitely notice a proliferation of these buildings in 5 years time.