I would like to share with readers the importance of demographics in driving home sales. Sue Rossi, a REALTOR® in Chicago, sent me a paper about a year ago on this important housing driver. I wanted to flush out the ideas a bit further, so I met with Sue to discuss. The key points are well researched and soundly based. As she lays out below, I agree completely that getting the first-time buyers back into the market is critical to get the housing market recovery going. However, I disagree with her on the housing supply impact of the baby boomers who are looking to sell homes as they reach retirement. Many of the baby boomers will no doubt look to sell their homes in the coming years to either trade-down or in the search for a ‘retirement’ destination. But these buyers act as both a home seller and a home buyer in these cases, so the inventory impact will be a wash, rather a pure addition of homes put on the market. For some baby boomers who have prepurchased their retirement home (as a second home) already, then it will be an increase in supply without an increase in demand. In addition, consumer confidence is critical to get the housing market back on track. And the confidence will build only with a rise in the velocity of sales, be it from first-time buyers or from repeat buyers. Finally, though demography is destiny and firmly establishes a long-term trend line, there can be quite volatile short-term market swings due to consumer exuberance, changes in economic conditions, or from lax underwriting standards. So 2009 can be seen as a year of short-term adjustment period. However, over the long term, expect the demographic factors to play an increasingly significant role, as Sue rightly explains.

On the east coast, Harvard University published a report projecting a steady rise in first-time buyers in the coming years due to the size of the next generation, the Echo Boom.

On the west coast, Professor Dowell Myers of the University of Southern California continues to study the level of inventory anticipated as the Baby Boom enters their retirement years and needs to sell.

Here in Chicago I am smack in the middle, literally and figuratively, remaining intensely focused on the generation in between the aging Baby Boomers and the coming Echo Boomers. In specific, I’m focused on the 1970’s and the story that needs to be told.

When the Baby Boom entered the market back in the 1970’s, the average age of first-time buyers nationwide was 25. There were millions of them and year after year they presented themselves to the real estate market in a seemingly never-ending march.

As we all know, first-time buyers start the whole process. They may buy a small ranch, freeing that homeowner to purchase a split-level, freeing yet another person to build new construction. It’s like a ladder, with every person on every rung dependent upon the kids to get on the first step and drive them up to the top and into the hands of a builder. We’re all dependent on this process.

However, during the housing hysteria the national average age of first-time buyers rose steadily from 25 to its peak of 33 in 2006. That means in 2006 we were dependent upon a person born in 1973 to come in at the bottom and drive everyone else up the ladder.

But they weren’t there when we needed them in 2006. Because they weren’t born in 1973.

Let me explain. Birth rates in this country plummeted from 1973 through 1978, resulting in a shortage of first-time buyers beginning in 2006. They’re not on any fence. They just aren’t around.

This occurred at the same time the oldest of the Baby Boomers (first born in 1946) turned 60 in 2006. The leading edge of the Baby Boom was thinking about retirement, causing a need for more first-time buyers, but we suddenly had fewer. In 2006 the real estate market experienced a suddenly skewed ratio of supply & demand which was certain to last several years without the proper remedial action.

Embedded in all that 2006 inventory there were homeowners in financial distress. Sure, some of them carried sub-prime mortgages. But others were in trouble for the same reasons homeowners have always found themselves in trouble -- death, divorce, illness, job loss. There are always people in trouble. The difference is that as long as demand at the bottom remained strong, those in financial distress were able to achieve a sale and get out of a mess. But when demand at the bottom came to a near screeching halt in 2006 those in financial distress could not compete with neighbors who were lowering prices and offering incentives, nor could they outlast the time frame allotted by lenders. Inventory stockpiled, foreclosures rose and the whole country learned about sub-prime mortgages instead of getting to the root of the problem which was a lack of first-time buyers due to low births in the 1970‘s.

The first-time buyer tax credit is the most powerful tool we have ever been given. Harvard is right - the Echo Boom generation rivals the Baby Boom in size and numbers. But if we endorse the proposed $15,000 give-it-to-everyone tax credit we will be providing a financial incentive for sellers who are currently waiting this out to put their home on the market now in order to qualify as a trade-up buyer. The result will be another piece of inventory for every trade-up buyer we think we’re “creating,” while the kids continue to buy vacant foreclosures instead of bumping someone up the ladder. If we think we have inventory issues now, watch to see what will happen if we give the Baby Boom a tax incentive to put their homes on the market all at once.

Focus on the kids and the rest will take care of itself. They are out there in sufficient numbers. But the Baby Boom sellers are also in the wings -- waiting to trade-up or retire. We need to extend the first-time buyer tax credit, but modify it to be applicable only if the kids purchase from an owner-occupant to ensure maximum trade-up activity, stabilize prices, reduce inventory and stimulate new construction.