Home foreclosures, sub-prime loans, and underwater mortgages have understandably dominated concerns about the collapse of the housing market. Yet plunging home values have also triggered equally devastating consequences for the retirement hopes of millions of older homeowners. Perhaps even more than falling retirement-plan investments, 30 percent to 40 percent drops in housing values are destroying the very foundations of retirement for people who did all the right things and played by the rules. Dean Baker, founder and co-director of the Center for Economic and Policy Research (CEPR), spoke to largely closed ears and minds as far back as 2002, when he warned of an imminent housing collapse. He has since turned his attention to the impact of that collapse on older Americans.
Falling home prices have "decimated the wealth that baby boomers have accumulated in their working years," he said recently in Senate testimony. The median net worth in households with a person aged 45 to 54 has fallen by more than 45 percent during the past five years, dropping to $94,200 this year from $172,400 in 2004. For people aged 55 to 64, the decline was worse: a nearly 50 percent drop in median wealth to $159,000 in 2009 from $315,400 in 2004. Because most housing equity is held by older homeowners who've been paying down mortgages for many years, they are disproportionately hurt the most by plummeting home values. Younger consumers, by contrast, will eventually be able to enjoy great housing bargains due to lower prices, causing Baker to view the loss of an estimated $7 trillion in home equity as nothing less than an enormous inter-generational transfer of wealth.
"Real house prices have fallen by more than 30 percent from their peak in 2006," Baker said in similar House testimony, "and will almost certainly fall at least another 10 to 15 percent before hitting bottom." He projected in an e-mail that prices will fall 10 percent below long-term trend levels by late this year or early in 2010. The road back, he warned, will take a long time. Home prices "might get back to 2007 levels in around 15 to 20 years, if we assume that inflation averages 3 percent." As a result, he testified, baby boomers will be like newlyweds, at least in terms of their homes:
Instead of having a home largely paid off by the time they reach their retirement years, many baby boomers will be in the same situation as first-time home buyers, looking at large mortgages requiring decades to pay down. Furthermore, the loss of equity in their current homes will make it far more difficult for baby boomers to move into homes that may be more suitable for their needs in retirement. Millions of middle-class baby boomers will find it difficult to raise the money needed to make a down payment on a new home.
A recent CEPR study found that the impact of lower home prices was especially severe for lower-wealth households. Depending on the size of future home-price declines, the study said, "up to 63 to 82 percent of homeowners in the bottom quintile [of wealth] in 2009 may be underwater in their mortgages, compared to 16 percent in 2004. Homeowners in the middle quintile fare better by this measure—we project 28-39 percent of those households aged 55-64 to be at risk in 2009, compared to three percent in 2004."
The housing bubble inflicted another cruel blow to homeowners, Baker says. Home prices increased so much that people felt they didn't need to stick with their traditional savings plans. As a result, "tens of millions of families opted not to save during what would typically be their peak saving years." Now they are approaching retirement with little except Social Security and Medicare to support them.