Homeownership in Retirement: an Asset or a Burden?

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The conventional wisdom for older workers heading into retirement is that owning a house is a good thing. The property has no doubt appreciated over many years, adding to their wealth. 

But new research finds that homeowners often strain to a pay a mortgage that is larger than what they can realistically afford. The essence of the problem for retirees, who usually rely on savings to help with living expenses, is that many do not have enough to make their monthly payments comfortably.

This problem has become more pressing over the years. Half of the retired homeowners who were born in the early years of the baby boom wave are still making mortgage payments. They are in a very different situation than their parents’ generation when the majority of retirees owned their homes free and clear.

Buying a house has also become increasingly expensive, and the size of the typical retired household’s mortgage has more than doubled compared with their parents, to about $108,500 in inflation-adjusted dollars.

Retired Black and Hispanic homeowners have even less to fall back on. Their financial assets are under $20,000, compared with $134,000 for Whites.

Although White homeowners tend to be in better financial shape, being more heavily leveraged is also an issue for them. The researchers found that households that don’t have a mortgage have the most financial assets, while those with the most housing debt – because, in many cases, they bought a relatively expensive house – have the least in savings.

Older people struggling to pay a mortgage face difficult choices. One option is to delay retirement, and the most leveraged households retire a full year later than those that don’t have a mortgage payment. “High housing leverage,” the researchers said, “may induce later retirement.”

To make ends meet, the largest mortgage holders also spend less money on non-housing expenses, whether food or travel. Retirees naturally spend less as they age. But consumption spending between ages 65 and 81, for example, falls by 39 percent if the household has a larger mortgage than is typical. This compares with a 28 percent drop for homeowners with relatively small mortgages.

While a house is an asset, it is not a liquid asset. Retirees who can no longer afford a mortgage payment may be forced to sell to cash in on the equity and relieve their financial stress. “Unsustainable mortgage borrowing,” the researchers said, is an even bigger issue for Black and Hispanic retirees.

It turns out that homeownership has financial value only for some – the most privileged retirees, who are mostly White. Using a model that simulates financial decisions, the researchers find that well-off retirees can benefit from selling the house and cashing in on the equity to fund nursing home care or an assisted living facility, which can cost $55,000, $100,000, or more a year.

For them, a house is a form of “informal long-term care insurance,” they concluded.

To read this study by Leora Friedberg, Wei Sun and Anthony Webb, see “The House: is it an Asset or a Liability?”

The research reported herein was derived in whole or in part from research activities performed pursuant to a grant from the U.S. Social Security Administration (SSA) funded as part of the Retirement and Disability Research Consortium.  The opinions and conclusions expressed are solely those of the authors and do not represent the opinions or policy of SSA, any agency of the federal government, or Boston College.  Neither the United States Government nor any agency thereof, nor any of their employees, make any warranty, express or implied, or assumes any legal liability or responsibility for the accuracy, completeness, or usefulness of the contents of this report.  Reference herein to any specific commercial product, process or service by trade name, trademark, manufacturer, or otherwise does not necessarily constitute or imply endorsement, recommendation or favoring by the United States Government or any agency thereof.

5 comments
David Erwin Jr

Most people don’t understand how to include housing wealth in their retirement income plan and they have a lot of misconceptions about reverse mortgages.

Carl

The taxes, keeping the house systems current, and maintaining the premises up to date are costly expenses in California; we regularly see homes run down to the point a scrape and or huge markdown is needed. The home industry is a marketing tool used by the real estate industry and for lobbying government agencies.

Gene

You will own nothing and be happy

George Wilson

Retirees typically have paid off their home mortgage. How to lever up that “dead” equity is something that needs to be expanded upon. Reverse mortgages are one solution, but others are needed.

Robert A

The other expenses that appear out of scope for this article but can be problematic, even when a house mortgage is paid off, are insurance and real estate taxes. Admittedly, these are hopefully not as much as whatever the monthly mortgage rate was but there is still some ongoing expenses. The other “category” of expenses tied more directly to the house is maintenance. Those usually involve periodic and irregular expenses (roof, water heater, plumbing, yard fence, deck replacement, for examples). These chunks of money ranging from hundreds to thousands of dollars can be an unfortunate financial surprise.

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