Housing Wealth Is Primary Source of Financial Security
Housing wealth recently has become the main source of financial security — and a possible cause of concern — for older Americans entering their retirement years, according to a recent study by the Joint Center for Housing Studies at Harvard University.
“Housing Wealth and Retirement Savings: Enhancing Financial Security for Older Americans,” released in September, examines the impact that housing wealth is having on investment and retirement decisions and “consumption and investment activities” among senior citizens.
The study pointed out that “…residential real estate has grown to become the largest single asset class” held by households headed by people 65 or older. According to the study, more than 80% of seniors owned a home and those homes were valued at more than $3.16 trillion — $3.95 trillion when second homes are included.
Though a majority of older home owners rely on housing wealth as a source of retirement savings, the study also found that many aging consumers still rent and therefore are not able to take advantage of housing wealth for their retirement savings.
“[T]here can be little doubt that renters in general, and low-income renters in particular, face a bleak retirement future given the relatively limited reach of current Social Security and other income support systems now in place,” the study pointed out.
How much seniors could take advantage of housing wealth also depended on local housing markets, according to the study. Local housing markets vary widely across the U.S. and retirees in hot markets often will fare the best. “As a result, there is a certain lottery-like element to the role that home equity buildup plays as a source of retirement savings, with the winners generally being those lucky enough to live in areas where home prices have appreciated most rapidly just as they prepare to move into their retirement years,” according to the Harvard study.
Gains in Equity Accompanied by Increased Mortgage Debt
The past decade has seen a rise in both housing equity and mortgage debt, according to the study. After a steady increase in real estate prices, the “median net wealth holdings for homeowners headed by someone ages 65 to 74 increased from 1992 to 2001 by close to $100,000 to just shy of $250,000.” But these strong gains in equity also have been accompanied by mortgage debt ―and older households are carrying much of the mortgage debt.
“Tracking specific age cohorts over time reveals that each succeeding generation is carrying more mortgage debt into their older years.” Part of this is due to consumers’ ability to swap mortgage debt for unsecured debt, such as credit cards.
“Even more remarkable is the level of debt these older home owners carry into their retirement years," according to the study. "After adjusting for inflation, the median mortgage debt of those older home owners more than tripled to $44,000 in 2001.”
The study examined the dilemma faced by lower-income households. “While it seems unlikely that home prices will fall precipitously in the future, it still is true that persistent homeownership affordability problems will continue to limit the ability of low- and moderate-income families to realize the wealth-building potential of homeownership.”
For those low-income families that do own a home, the costs of utilities, taxes and other costs make housing expensive, the study reported. In addition, mortgage debt “increases the housing cost burden of lowest-income older home owners.”
The study concluded that, while homeownership is not an answer for all older Americans, the housing industry should still strive to “create home buying options that not only are affordable in the short run, but buffer these new buyers from the significant downside risks associated with owning a highly leveraged asset.”
Also, once these consumers sell their houses, it is important to give them affordable housing options for their next life stage. While many will benefit from increases in home equity, it is important to have sources of retirement income for those who will not.
“The inability of all households to realize the benefits of homeownership leaves behind gaping holes in the retirement security safety net,” the study found, while noting that housing wealth was “no substitute for a comprehensive set of housing and income support policies designed to help households prepare for retirement”
“The best retirement support policy will undoubtedly involve a mix of income transfer programs and housing assistance efforts that enable retired people to sell their homes and tap into accumulated home equity,” the study indicated.
“Housing Wealth and Retirement Savings: Enhancing Financial Security for Older Americans” was conducted by William C. Apgar and Zhu Xiao Di.
To read the study findings, click here.
Attend the 2006 50+ Housing Symposium in Phoenix
Learn more about the fastest-growing segment of the housing market. Plan to attend Building for Boomers & Beyond: 50+ Housing Symposium 2006, the premier educational and networking event for industry professionals serving the burgeoning 50+ market, in Phoenix from April 24-26. For more information, click here.