Tuesday, September 2, 2008

Housing and Retirement

During the boom everyone seemed rich. The thought was just sell your house and take your big pot of money. Remember house prices only went one way. The investment seemed like a sure thing. Sure enough to bet your retirement on. Although the gamble did not come out as many had expected. Instead of ending up wealthy many are in trouble. This CNN Money article titled How the housing crash hurts your retirement illustrates some of the problems with counting your home as part of your retirement income. Lets take a look -

According to a recent report from the Center for Economic and Policy Research, a Washington, D.C. think tank, the collapse of house prices that started in 2006 has wiped out more than $4 trillion in home equity, putting a sizable dent in the net worth of millions of baby boomers.

Among its more ominous findings: By next year, the average net worth of households headed by homeowners age 45 to 54 will be almost 25% less than it was in 2004.

...
The housing bubble had another perverse effect on our planning: It led us to save less. "Many people thought, 'I'm wealthier, I already have a big chunk of my nest egg thanks to my house, so I don't have to save as much,' " says Moody's Economy.com chief economist Mark Zandi.

...
Many homeowners exacerbated the damage done by falling prices by borrowing heavily from their homes. Federal Reserve economist James Kennedy estimates that from 2002 through 2007 owners pulled $2.5 trillion in equity out of their homes via cash-out refinancings and home-equity loans.

That's nearly a third of the increase in home values over that period. While there are many valid reasons to borrow against your home, it can also be comforting to know that your home equity will be there later in life for emergencies.

Feeling rich led to cashing out one's equity. Now the equity is long gone but the money borrowed is still owed. It seems that some people really believed that the double digit gains would continue forever and they would be rich, rich, rich. As we know now that did not happen, not even close.

1 comment:

JM said...

I know of several individuals who counted on home equity and syrocketing prices to finance not only retirement but also college tuitions for children. One friend well into her 40s told me last year she just started making 401(k) contributions and that her house would take care of the rest. Why bother saving into a 401(k) or a 529 plan when the Great Housing Bubble will pay for Junior's college tuition and for your retirement in Florida? We'll see how many Baby Boomers can actually afford to stop working when they want to retire.