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Loss Of Home Equity Destroying Retirement Dreams

Back in 2005, I had an interesting conversation with one of my neighbors in Gilbert, AZ.  She was telling me that she and her husband had changed their investment strategy.  They felt that with the median home price in the area up 30% over the previous year, they had given up on all their other investments, and they were going to “invest” all of their money in their home.  As I recall, the “investing” they were doing at the time was installing a pool and built in barbecue.  I haven’t seen my old neighbors in years, so I can’t tell you how their strategy worked out.  My guess is, not well.

My neighbors were not alone in their strategy.  There were a lot of folks who felt their home equity would be sufficient for their future long term needs.  Who needed a savings account, a stock portfolio or an IRA when real estate outperformed them all?  Heck, you could even buy nice cars, go on luxurious vacations and still count on a comfortable retirement when you sold the house. Now it looks like that strategy may have backfired permanently .  [Hat tip M.R.]

Even if the housing market starts to improve throughout the country in the next few months, and actually begins an upward trend, the damage done to middle class homeownership can’t be estimated even by using the most sophisticated algorithms. As a result of changing business models, many Americans looked to the equity in their home as their 401K plan and the foundation for retirement. For many homeowners, equity equaled net worth. With that equity evaporating, and an inability to sell a home even at drastically reduced prices, lives have been so dramatically impacted financially, that a “housing recovery,” if and when it happens, may not really matter.

Not only is the equity gone, but many of the potential buyers as well:

Remember those 80 million baby boomers who were about to retire and move all over the country? In places like Arizona, Florida, Nevada and North Carolina, builders counted on that wave of retiring boomers to sell their homes in high property tax states and to move to cities with lower taxes, attractive lifestyles and better weather. But if you can’t sell your home, and if your equity has disappeared even if you can sell your home, you won’t be relocating any time soon and the oversupply of inventory can’t be absorbed. That inability to sell has resulted in a paralysis taking over the housing market that the monthly movement in housing statistics doesn’t really capture. Unfortunately, the gears of the real estate economy that have always been counted on to churn out the jobs are now frozen.

I did try to tell my neighbor back in 2005 that to put all of your investment dollars in one place was risky, but I could tell that my advice was falling on deaf ears.  After all, real estate was a “safe” investment.    I wonder if their new plan these days is to work until they are 90?

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One Comment

  1. Sho off Sho off

    Twist,

    As a Realtor, I feel most sad for those who relocated, paid cash, and now have been afficted with those problems related to aging. Parkinson’s, Dementia (of all types), loss of mobility (either legs or auto) have trapped many far from family.

    Even if they put the $1,000,000 home up for sale for $500,000 there are no lookers. Imprisoned, far from family, desperate to leave to be near help.

    Flat out stuck and depressed. Sad, but they are the ones who paid cash. At least those who got a loan can walk. The rest are buried. Most forgot the most important room: the crypt……’cause they are buried.

    Check out the REO problem in 55 and older communities, it’s more than first time home buyers walking away.

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