Recent reports that younger people (aged 38 to 34) prefer to rent rather than to buy homes is not only bad for the $10 trillion housing industry, but it also is bad for retirement accounts.
A new report by the Stanford Center on Longevity found that “the homeownership rate fell to 63% in 2016 – the lowest rate in half a century, and down from the all-time high of nearly 70% by the end of 2005, the peak in subprime lending,” according to a report on CNBC. The bad news is that the home ownership rate for Millennials (those born from 1980 to 1984) at age 30 was only 35%. “Homeownership is especially down among millennials. Compared to those born around 1960, people born in the early 1980s are less likely to own a home by age 30,” the Stanford researchers said. Delaying this critical purchasing decision means less home equity, a main driver of retirement wealth.
Among Baby Boomers, that rate was 48%. There are many good reasons for not buying a house, ranging from student loan debt to postponing marriage and starting a family, but the delay is also going to be a big hit financially.
This is because housing accounts for about 70% of the non-financial assets of middle income Americans age 55-64, and this excludes the value of Social Security and defined benefit plan pensions (401ks). If you take this chunk of wealth building potential out of the equation for younger people, it will be hard to replace from the outperformance of financial assets, such as stocks and bonds.
If the past is any indication, the decision to rent rather than own a house involves many factors, such as the ability to pay real estate taxes, maintain the house, make needed home improvements over time and balance all that against the time constraints of having a family and managing leisure time.
Yet for anyone of any age group planning for retirement, it’s time to assess what your financial future holds and what financial engines are working in your behalf. This is a finely-balanced equation and any disruptions in only a few of these drivers will seriously alter your financial wellbeing.
Critical Drivers of Wealth
First, here are the critical wealth drivers that the vast majority of Americans have to work with: Social Security, Medicare, pension plans, 401(k) plans and, increasingly, house prices. Retirement experts and academics also factor other financial and nonfinancial wealth components into this calculation, including human capital (expected future labor earnings after retirement), personal savings, life insurance, annuities, gifts and inheritances. As you can see this is a short list. There is no lottery that will fill your financial retirement gap.
Of these components, the most important are Social Security and home equity. Social Security benefits range from replacing approximately 45% of wages for the least wealthy individuals to replacing approximately 10% of wages for the wealthiest individuals. Home equity (defined as purchase price less the mortgage balance) accounted for 9% to 14% of total wealth.
This is why the current political attempt by the Republicans to reduce or replace Social Security with private investment accounts offered by high fee and expense investment firms will reduce the net returns of any investments for millions of Americans. In short, this could produce one of the larges wealth transfers from the average Americans to private investment firms.
Still, the powerful cultural draw of owning a house is hard to overcome. Home ownership is part of the American Dream. Abandoning that goal means their dream won’t be attainable for many people. What will replace it? What will drive future goals?
These are tough questions, but looking at the recent past shows the upside and downside of home ownership.
The Impact of the 2008 Housing Crash
As a result of almost a decade of steadily improving house prices that ended in the 2008 housing crash and subsequent recession, housing had become the largest single financial asset among American families, especially among homeowners headed by the age group approaching retirement (usually age 55-64).
However, the dramatic and historic decrease in housing values of approximately $400 billion between 2007 to mid-2008 significantly altered the retirement plans of many Americans.
For Baby Boomers planning to retire, housing wealth accounts for a majority of their net worth. While this figure is skewed according to demographics (education, race, age within the Baby Boomer segment, marital status, sex), 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.
This decrease in home prices had a compounding effect on diminishing individual wealth.This produced a cascading effect which impacted entire families, especially single or divorced women and widows. This decreased wealth effect is especially acute among people approaching retirement age who will now have to consider extending their retirement dates into the future.
The decrease in housing values is especially important since home ownership among the Baby Boomers has traditionally increased with age. As a result, older people rely more on their home equity as a source of wealth and as insurance against unforeseen negative life events, such as a serious illness or the death of a spouse. Decreased home values also have resulted in reduced confidence in future retirement planning for people of all ages.
The Revised American Vision
Millennials choose not to buy homes for a variety of good reasons, ranging from delaying marriage top staggering student loan debt, to making the most of stagnant real wage growth. But the bottom line is that fewer Millennials are signing mortgage documents. To the Stanford researchers, who often have to put a non-political face on their research, these results are summed up as “Refining strategies to address the declining homeownership rates among young people remains an important policy issue.”
That is certainly as understatement, but it is not going to gain any political traction. This is because no federal or state officials have
developed even the most basic retirement wealth policies since the introduction of 401(k)s in 1978. Today, the financial services industry continues to spend millions with lobbyists to oppose the fiduciary standard, a standard that in simple terms can be stated as “Never give a sucker an even break.” The suckers are individual investors and they won’t be getting a break from non-RIA advisors and national investment firms who want to sell overpriced products without disclosing their own conflicts-of-interests.
If you combine this with the decline in housing wealth and continued Republican attempts to privatize Social Security to any degree, it is a recipe for a lower standard of living for older Americans for years to come.