Like most Americans, something I’ve been worrying about recently is the housing crisis. I don’t own a home (I live in NYC). And I have no plans to change this. So this isn’t really a personal worry. But one of the things that has been on mind, and has not really been covered in much of the press on this issue is a demographic concern. Which is basically this: a sizable number of Americans have been banking on the values of their homes counting toward a considerable amount of their retirement. The value of these homes is rapidly decreasing, and if the number of homes going on the market increases significantly (a cohort of folks putting their homes on the market, increasingly the supply) the crisis will be aggravated.
1.) Median home prices are going down significantly. Looking at the 20 period in Southern California, for example, there is about a 25% drop in median home values. And this is not simply explained by massive deceases in very expensive homes. If anything, they are only recently dropping (the effect yet to be seen). You can see this for other metropolitan areas here. And Fanny Mae’s projections are below (which actually seem less dire than I would guess).
2.) For the first time since we’ve been gathering the data (1945), Americans have less than 50% equity in their homes (see here). As of right now more than 10% of home owners have negative equity (meaning they owe more than the value of their house). And markets continue to decrease, this number could climb into the 20% range. Not good if 1/5 Americans owe more on their home than its value. Especially since we tend to have no significant other form of savings.
3.) Over 40% of Americans plan on using the equity in their homes as a source of retirement, upwards of 25% are planning on it being a “major source” of their retirement income (See here, which does not report those who plan on using the equity as a minor source). Most older workers (age 55-64) do not have any real source of retirement income other than social security and home equity. 75% of these older workers live in households with retirement accounts of less than $54,000 - which is most certainly not enough to retire on, since these people can expect to live into their 80s (see here).
4.) Upwards of 78 million people will be retiring in the next 20 or so years. By 2030 we might expect a 75% increase in the number of people over 65 (see here). While many of these folks will continue working through retirement (and many will die before ever reaching retirement, so the estimates strike me as very high), this still means a pretty significant retirement problem.
My big point is, I think it would be very interesting to see the housing problems mapped onto what we know about savings within cohort and the soon-to-be large cohort of retirees. Anyone know of work being done like this?
I should have been a demographer.
* Disclaimer: I don’t work on this stuff. So this is not a professional opinion. It is simply one by a mildly educated citizen.
9 Comments
Well, I asked a friend of mine and he said that there were surprisingly few studies of this sort, though it was an obvious issue. The key point he claimed was that demographers and economists don’t mix well. Economists really don’t like ascribing business cycle phenomena to population shifts. However, he did agree that someone could really hit a home run with this topic if they did it well.
One of these days I will meet an economist who hits singles and doubles, in addition to home runs.
Sorry, Kieran, I just don’t know the relevant Irish hurling analogy.
It’s not you, Fabio. Economists are always going on about home runs.
If they read orgtheory, economists would know that it’s about on-base average.
My mother-in-law recently sold her house. Interestingly, while I saw this as selling in a falling market, she compared the price to the price she paid for the house in 1979 or so. So for her the price has tetrupled or whatever. Not declined.
Plus, damn, still prices have doubled from ‘00 levels. When did it become assumptive and part of the permanent landscape that your money would double every 8 years? I think people who expect that are a bit bananas.
On the other hand, I think the premise that people will use their home’s equity as retirement is totally worrisome.
FR: I think the idea that economists would ascribe the gist of orgtheory to something like ‘yay Moneyball’ is not necessarily a good thing…Plus, I always thought it was about ferrets.
Somebody at RWJ told me about an economist at Chicago who wrote a letter of recommendation for a grad student that described him as someone who would hit a lot of doubles but no home runs.
I think Peter has a good point here. Those not into their houses before 2004 should still be ahead, even if they have hit no home runs. Still, pity the retiree who bought in 2007.
Interesting question. I haven’t seen any research on this either.
In my limited experience, many economists are loathe to investigate phenomena that do not involve exogenous shocks, and I doubt the fall of housing values would meet this qualification. This limitation is unfortunate because it rules out a lot of very interesting questions at the intersection of demography and economics.