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Housing crash hits baby boomers

Home-price declines will eat into boomer retirement nest eggs: report

By Amy Hoak, MarketWatch

Last update: 8:02 p.m. EDT June 24, 2008

CHICAGO (MarketWatch) -- The collapse of the housing bubble will likely have drastic implications on the wealth and retirement of certain baby boomers, according to a report Tuesday by the Center for Economic and Policy Research.

The median household headed by those between 45 and 54 in 2009 will have about 25% less wealth than the median household of that age in 2004, according to the report. That household's wealth will decline to $113,268 in 2009, from $150,113 in 2004.

And that's if housing prices remain at the level they were in March.

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The report, "The Housing Crash and the Retirement Prospects of Late Baby Boomers," extrapolates from data in the Federal Reserve's 2004 Survey of Consumer Finances (the most recent available). The authors also used the Case-Shiller home price index for their estimates. Read the report (PDF).

The Center for Economic and Policy Research is a Washington, D.C.-based nonpartisan think tank that focuses on economic and social issues.

The picture gets even worse if real home prices fall more. If prices, adjusted for inflation, fall 10% by 2009, the median household would see a 35% drop in wealth compared with the same age group in 2004; and if prices fall by 20%, there would be a 46% difference.

Renters were better off in all three scenarios than homeowners, according to the report. Renters haven't experienced home-price gains and didn't have an opportunity to tap home equity, said Dean Baker, co-director of CEPR and co-author of the report.

Homeowners "sort of assumed that house prices would keep going up ... they didn't think they had to save," Baker said. This thinking caused many people to extract some of their home's equity -- or at least prompted them to save less, he said.

Homeowners "were content to allow the bubble driven build-up of wealth in the form of home equity to substitute for savings out of disposable income," the authors wrote in the report. For this age group, households didn't save enough during what should have been their peak saving years, according to the report.

Further, after deducting 6% for real-estate transaction costs, almost 14% of homeowners in the middle wealth group examined in the survey would have negative net equity after selling their home, even if prices don't drop more.

Tapping the house

Video: Swift housing correction

The correction in the housing market is happening much faster than usual, thanks to Wall Street's relationship to the recent lending spree. USC real estate economist Delores Conway says the turnaround will be much slower. Stacey Delo reports.

The boomer home-equity situation is important for a couple of reasons, Baker said. One, the absence of substantial home equity removes the cushion they might need for emergencies, including expensive medical bills, he said. While reverse mortgages still aren't used by a big share of retirees today, that option is not a possibility for people without much equity in their home, he said.

Also, the opportunity to access a large chunk of equity by downsizing to a smaller home disappears when the homeowner still owes a lot.

Plus, many of these boomers are "going to be facing a mortgage payment well into retirement," Baker said. That's a shift from past generations: The major asset that most middle-income families in years past would bring to retirement was their home - and it was often paid off, the report noted.

"Unfortunately, due to the rise and collapse of the housing bubble, this may not longer be the case," the authors wrote in their introduction.

Benefit cuts? Not now

The issue will be revisited by the Center when new data is released next year, Baker said.

For now, they're making the case that any benefit cuts to Social Security and Medicare would "impose serious hardships" on the finances of those approaching retirement.

Moreover, the authors suggest that homeownership is not always an effective way to accumulate wealth, and they blame economists and policy professionals for not recognizing the housing bubble that they claim could be seen as far back as 2002.

"Unfortunately, we had this huge cohort of baby boomers and they really weren't paying attention," Baker said. "People who should have been saving for their own retirement weren't."