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Housing Crash Crushes Suburban Ideal

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As the nation's home builders try to claw their way out of the biggest abyss in the sector's history, the future landscape is beginning to look a bit different than they once thought.

All those "ex-urban" communities that were supposed to be the place to put shovels and money are falling victim to a changing demographic, or more accurate, a demographic that has been forced to change.

I was just reading a study from the Urban Land Institute's John McIlwain entitled, "Housing in America: The Next Decade." McIlwain divides housing demand into four major demographics: Aging baby boomers, younger baby boomers, children of baby boomers (Gen Y) and immigrants.

In the coming decade fewer of the Older Boomers will be moving. Those who have not yet sold their suburban homes find themselves trapped as falling home prices have left their homes “underwater,” worth less than the mortgage(s) on them. It will take years before home prices rise sufficiently to restore their lost equity. Those that can move are no longer flocking to the Sun Belt, choosing instead to move closer to their children, and, more importantly, their grandchildren.

I've written a lot about the different expectations of active baby boomers when it comes to housing, how they will need communities that cater more to a 5-9 (am and pm) home life than the previous generation that was fully retired by age 65 and at home 9-5.

The Younger Baby Boomers – The younger cohort of Boomers is facing very different challenges. They have decades before they consider retiring and their children are likely to be still at home, either because they have not left yet or because they have “bounced back.” Many find their suburban homes now “underwater” and even those not “underwater” will be hard to sell. The older Boomers sold their suburban homes to the larger population of younger Boomers looking to move up; the Younger Boomers now have the much smaller Generation X, now in their late thirties to mid-forties, to sell to. Generation X is also made up of smaller households, is a more urban generation, and is facing distinct economic challenges.

This is very interesting to me, as the younger baby boomers are really the move-up market that is so necessary to boost overall home prices. Luxury home builder Bob Toll claims the luxury home market is back in business, but without the younger boomers, and with a higher percentage of prime jumbo loans defaulting, I'm skeptical. And then there's Generation Y, which is supposed to be forming new households at lightening speed. Not so much, thanks to falling incomes and high unemployment.

Generation Y is at the age of highest new household formation but is instead living in their parents’ basement, have doubled and tripled up, or gone back to school to weather the storm.

The good news is that Gen Y will supposedly have a smaller impact on the housing market than Baby Boomers who are such a large cohort. Still they will be renters for far longer than their parents or grandparents ever were, and again, that means generally they will be in more urban settings. Finally, immigrants comprise about 13 percent of the U.S. population (legal and illegal):

Immigrant populations naturally cluster together. These clusters have moved from the central cities where they tended to gather in the past to the inner suburbs over the last two decades. It is not clear yet whether they will make the jump to the next ring of suburbs. Latinos especially favor larger homes as they have larger, often multi-generational families. This would favor moving to those suburbs with larger home if they can afford them. On the other hand, they also like living closer together, not isolated from one another and with a greater sense of community than most people experience in the suburbs. This suggests that the established cul-de-sac suburbs may not be attractive to them.

Given everything in this particular study, and others I've read like it, I tend to think that housing investment dollars over the next decade should be spent in urban and close-in suburban settings. That's where Boomers want to be and that's where young people want to be. With the lost housing generation in the middle (i.e. me) bearing the brunt of the recession and the housing bust and unable to play in the housing market the way they once did, the big houses in the suburbs are more likely to stagnate in sales and prices.

Questions? Comments? RealtyCheck@cnbc.com

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  • Diana Olick serves as CNBC's real estate correspondent as well as the editor of the Realty Check section on CNBC.com.

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