The Wealth of Older Americans and the Sub-Prime Debacle

Abstract

This study explores the consequences of the housing price bubble and its collapse for the wealth of older households. We utilize micro survey data to follow the rise in home values to 2007, observing which households enjoyed home price appreciation and how they responded in terms of equity withdrawal. We then use the SCF survey data on wealth holdings from 2007 in combination with national price indexes to simulate the magnitude and distribution of wealth loss from the 2008-2009 financial crisis.  The collapse of the housing market triggered a broad decline of asset prices that greatly reduced the wealth of all households.  While older households mitigated their real estate and equity losses with relatively stable fixed-value assets and pension programs, no demographic group was left unscathed.

Prior to the financial crisis, our study and others had concluded that the current baby-boom cohort of near retirees were surprisingly well-prepared for retirement compared with similarly aged households over the past quarter century.  Unless there is a strong recovery of asset values in the next few years, that favorable assessment is no longer true.