Homes aren’t the golden nest egg many expected

Baby boomers, the largest, healthiest and wealthiest group ever appearing on the U.S. growth landscape, never met a loan they didn’t like. After leveraging appreciation and location in their starter and move-up homes to pay for cars, college tuitions and trips, their home probably holds most of the equity in their lives.

According to a new report by the Washington, D.C.-based Center for Economic and Policy Research, that home is not worth what it used to be. Coupled with the recent turmoil in the stock market, many boomers will be completely reliant on Social Security and Medicare to support them in their retirement years.

“The collapse of the housing bubble, which led to the recession, has already destroyed almost $6 trillion in housing wealth for homeowners,” said report co-author Dean Baker.

The study, “The Wealth of the Baby Boom Cohorts after the Collapse of the Housing Bubble,” analyzed the wealth holdings of families headed by people ages 45 to 54 and 55 to 64 in 2004 and projected their wealth in 2009. The findings are presented by income category under three scenarios: house prices remain at November 2008 levels (the latest data available), house prices fall by 5 percent from November levels, or house prices fall by 15 percent. In all three scenarios, the vast majority of these families will lose a substantial portion of their net wealth in 2009. Hence, the report affirms the need to protect programs such as Social Security and Medicare.

The center’s analysis counters a 2004 economic study prepared by The Urban Institute for AARP. In the 2004 study, authors Barbara Butrica and Cori Uccello contend that boomers will amass more wealth in real terms at retirement than will the two previous generations. Median household wealth at age 67 will grow from $448,000 among retirees to $600,000 among boomers.

However, other researchers, including Larry Cohen, director of Princeton, N.J.-based Consumer Financial Decisions, wonder if boomers, given their spending history, will ever get to the traditional retirement years with any real assets.

“As the cohort responsible for the explosion of credit use in the 1980s and 1990s, boomers are hardly likely to forgo immediate gratification in their later years,” Cohen said.

The run-up in housing values also nurtured the idea that actually saving a portion of one’s monthly salary was simply not necessary. Not only did appreciation supply a surprisingly large down payment on an owner’s next home, but it also floated all checkbooks and households bills. They not only spent, but they “dis-saved,” according to the authors.

“I would be less harsh (on the boomers) because borrowing against home equity is, in fact, a perfectly reasonable thing to do, if the equity is real and not just bubble wealth,” Baker said. “To be specific, if someone saw the value of their home double from $200,000 to $400,000, there is no reason they should not borrow a portion of this gain to meet immediate needs or even for relative luxuries like a vacation or a new car, if the gain is likely to endure, and probably increase in future years.

“I see the fault lying primarily with the people — the so-called experts — who are paid to know better and either did not, or for some reason failed to share their knowledge with the public.”

Because boomers have not saved, they will be forced to work longer and/or move to a less expensive place than they anticipated. Property taxes, health care and the cost of living will force boomers to more than thinking about moving to other countries, especially if they plan on living at the same level of comfort as they do now.

“I expect that many boomers may look to Mexico and other developing countries as a way to make their dollars go further in retirement. It will be a good option for many people,” Dean said. “The government can make this easier by allowing people to use their Medicare to buy into the health care systems of other countries. This should be a win-win, since if beneficiaries rely on the health care systems of other countries rather than our Medicare system, it could lead to enormous savings for the government.”

The message: While long-term housing historically has been an excellent avenue to wealth, it does not always work in the short term. When you have no skin in the game and you consistently bet on the come, don’t be surprised when debt arrives to bite you.

Tom Kelly’s book “Cashing In on a Second Home in Mexico: How to Buy, Rent and Profit from Property South of the Border” was written with Mitch Creekmore, senior vice president of Houston-based Stewart International. The book is available in retail stores, on Amazon.com and on tomkelly.com.

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