This is Part III of a three-part series on how homeownership can increase retirement wealth
Owning a home offers distinct tax advantages, especially by reducing tax payments through deductions for mortgage interest, property taxes, and financing costs. The most significant deduction often comes from making interest payments on either a primary or secondary residence.
Another deduction comes from the points buyers pay at closing, which reduce the mortgage interest rate. Often, these deductions are amortized over the entire mortgage term. For people who took out a line of credit or a home equity loan before 2018, that interest may be deductible if those funds were used to “buy, build, or substantially improve” the borrower’s primary home, according to the IRS Publication 530.
Other non-tax benefits of homeownership include greater financial flexibility through secured borrowing, built-in “default” savings from mortgage amortization and nominally fixed payments, and the potential to lower home maintenance costs through sweat equity.
Housing Options Available for Retirees
Besides tax benefits, homeowners can access equity loans and lines of credit to tap into home equity and appreciation.
Another option for securing home equity is an outright property sale. Many retirees, or people approaching retirement, downsize and move to a smaller house to cash out their home equity. These proceeds can finance assisted living or skilled nursing care. However, planning to sell the house later is risky in a world where home values fluctuate, and closing can take months. Also, if the house is not well maintained, its value can decrease.
Retirees on Medicaid may also use their home equity to obtain long-term care services in retirement. Depending on the state, some states might attach home equity after the homeowner dies to recoup Medicaid expenses. Accessing home equity while navigating Medicaid and long-term care is very complicated.
Housing Wealth and its Effect on Key Retirement Decisions
While homeownership is the engine for creating wealth, it also produces strong sentimental and psychological effects. A study of retirees indicates that most have not tapped their home equity to pay for current living expenses, even though 70% of these homes are owned mortgage-free by people over age 65.
Their reasons for not accessing home equity varied. Some said they wanted to keep their house instead of selling and then paying rent. Older people who want to keep their homes also contradict the long-held lifecycle model of consumption, which found that older people consume more as they age.
However, despite the large amounts of potential home equity available to older Americans, over 55% said they would not take out a loan unless they suffered a financial, medical, or emergency event. The reasons cited for not taking out loans included financial conservatism, older people working longer, and the desire to leave an inheritance to their children.
Owning a large amount of home equity also affects other vital decisions regarding work patterns for older Americans. These decisions include:
- Whether older people feel the need to work to meet monthly mortgage payments.
- Whether couples feel the need to work and own their house when they receive favorable treatment under Medicaid and similar benefit programs. In these instances, homeownership is not included in the asset-limit test some states use to determine eligibility for Medicaid or Supplemental Security Income.
One study found that homeownership, including the amount of home equity, affected older women’s need to continue working in old age. This decision also depended heavily on marital status, wealth, and education. As a result, any decrease in house value, combined with the need to meet mortgage payments, could significantly alter retirement plans.
These decisions to continue working in old age have a disproportionate impact on women due to their historically different labor force roles. Women traditionally have shorter or more interrupted work histories than men due to childbearing and rearing. They also earn lower wages and have a higher rate of participation as caregivers to aging parents. This creates a more severe impact on women’s retirement security. It may also help explain why 30% of single women (who represent a majority of U.S. households in old age) fall into the category of poor or near-poor.
The Role of Reverse Mortgages
Reverse mortgages allow homeowners to borrow against their home value without making monthly payments. The loan principal and interest are paid when either the house is sold, the last surviving spouse dies, or the borrower fails to meet the mortgage terms. Unlike other home loan products, reverse mortgage borrowers do not make monthly payments. This results in escalating, compounding interest that is added to the principal amount the borrower must pay annually. Reverse mortgage owners must pay real estate taxes and any required flood and homeowner insurance premiums. When the reverse mortgage holder dies,
Reverse mortgages fall into two categories: the popular government-backed reverse mortgage called the Home Equity Conversion Mortgage (HECM), which is originated by private lenders and insured by the Federal Housing Administration (FHA). The second, and less popular product, is a reverse mortgage issued by private lenders that is not federally insured.
HECMs are often used by people who have lower credit ratings because they often have fewer resources to make regular monthly payments. This group of borrowers also less likely to be approved for other home loan products, such as equity lines of credit. When the HECM borrower dies, can no longer live in the house, or the house is sold, someone must pay the principal, interest, HECM premiums, and other charges and fees in full. If any equity remains, it can be transferred to the borrower’s heirs.
The Impact of Housing Shocks, Recessions and Recovery Scenarios
For Baby Boomers planning to retire, housing wealth accounts for a majority of total net worth. While this figure varies by demographics (education, race, age within the Baby Boomer segment, marital status, sex, etc.), home equity accounts for one-third of net worth at the mean and 50% at the median. This makes Baby Boomers especially susceptible to housing price shocks, both positive and negative, which can significantly affect retirement planning and consumption patterns.
When house prices drop due to economic shocks or housing bubbles, this decrease compounds the loss of household wealth. This produces a cascading effect that impacts entire families, primarily single or divorced women, and widows. The bear market in the summer of 2008 caused workers aged 45 to 64 to delay their retirement dates and borrow from their 401(k) accounts. This decreased wealth effect is especially acute among people approaching retirement age, who now have to consider working longer or delaying retirement.
The decrease in housing values is especially significant since homeownership increases with age. As a result, older people rely more on their home equity as a source of wealth and as insurance against unforeseen adverse life events, such as a severe illness or the death of a spouse. Decreased home values have also reduced confidence in future retirement planning for people of all ages.
Housing prices are slow to appreciate and even slower to recover after a shock, as the following numbers illustrate. Using the Case-Shiller Index of U.S. national housing prices dating back to 1890, home prices hit an all-time high in 2006 Q1. In December 2008 (around the start of the housing bubble bust), the index posted its largest year-over-year drop. After the housing bubble began around 1999, the index’s low point was in 1Q 2012, at 114. By 4Q 2013, the index had rebounded to 134.
The 2008 housing market crash and the resulting recession serve as an example: declines in house prices, combined with the oversupply of foreclosed and for-sale homes, created a ripple effect across the entire housing market. This 2008 market event led to the foreclosure of about eight million homes and the destruction of about $7 trillion in home equity. One study found that housing market corrections have historic cycles lasting three to seven years.
But home price declines are only a part of the problem. Because of the 2008 housing market bubble, new housing cycle corrections could take over 20 years to reach an equilibrium state where buyers and sellers are proportional. The reason: When Baby Boomers aged 65 to 75 began to sell their houses after the 2008 housing crash, there were three sellers for every buyer. This created a “generational housing bubble” on top of the speculative housing bubble developed from 2005 to 2007. This shift (more sellers than buyers) started around 2010. In the past, without this significant demographic shift, housing corrections historically lasted three to seven years.
Any new housing bubbles would differ on a state-by-state basis as the number of older homeowners declines relative to younger homebuyers. Still, its overall impact will be the same: there will be too many sellers to sustain house price increases. This situation also would profoundly affect suburban areas where there is a preponderance of stand-alone, single-family homes. The disruptions caused by the 2020 COVID-19 pandemic added more uncertainty as employers shifted work locations from offices to remote access.
By 2025, home prices in some areas of the nation were declining due to high interest rates, the war in Iran, and weary consumers who reduced spending. In South Florida today, macroeconomic events have created a glut of unsold condos and homes, along with high Homeowners Association fees, rising insurance costs, building expenses, and a surplus of new apartments and high-end condos.
One podcaster in Miami has created a “Condo Cliff Index,” defined as “the moment when the cost of condo living becomes unmanageable for cash-strapped owners due to rising maintenance fees, hefty special assessments, and pricey insurance premiums resulting from the post-Surfside legislation.”
“The South Florida Vintage Condo Cliff Index—which tracks units at least 30 years old—posted an even stronger gain, climbing 1.73% to 9.15 points—also an all-time high—for the week ending April 7, 2026, from 8.99 points the previous week,” according to Peter Zalewski, the author of the site, The Miami Condo Investing Club.
