Harvard Study: Housing Wealth and Retirement Savings

The Joint Center for Housing Studies at Harvard University recently released a study on housing wealth and retirement savings titled “Housing Wealth and Retirement Savings: Enhancing Financial Security for Older Americans." The study examines how housing wealth plays into investment and retirement decisions, and its impact on “consumption and investment activities.”

As older Americans enter their retirement years, housing wealth recently has become their main source of financial security and a possible cause for concern. As the study points out, “…residential real estate has grown to become the largest single asset class held by households with heads aged 65 or older.” One reason for concern is that even though home ownership is on the rise for aging consumers, many still rent. Another cause for concern is hot local markets.

Local housing markets vary widely across the US, and retirees in hot markets often will fare the best: “As a result, there is a certain lottery-like element to the role that home equity buildup plays as a source of retirement savings, with the winners generally being those lucky enough to live in areas where home prices have appreciated most rapidly just as they prepare to move into their retirement years,” according to the Harvard study.

Equity and Debt

The past decade has seen a rise in housing equity and also mortgage debt. After a steady increase in real estate prices, the “median net wealth holdings for homeowners headed by someone ages 65 to 74 increased from 1992 to 2001 by close to $100,000 to just shy of $250,000.” But these strong gains in equity also have been accompanied by mortgage debt.

Older households are carrying much of the mortgage debt: “Tracking specific age cohorts over time reveals that each succeeding generation is carrying more mortgage debt into their older years.” Part of this is due to consumers’ ability to swap mortgage debt for unsecured debt, such as credit cards.

“Even more remarkable is the level of debt these older homeowners carry into their retirement years. After adjusting for inflation, the median mortgage debt of those older homeowners more than tripled to $44,000 in 2001.”

The study examines the dilemma faced by lower-income households. “While it seems unlikely that home prices will fall precipitously in the future, it still is true that persistent homeownership affordability problems will continue to limit the ability of low- and moderate-income families to realize the wealth-building potential of homeownership.” For those low-income families that do own a home, the costs of utilities, taxes, and other costs make housing expensive. And for those that do have mortgage debt “increases the housing cost burden of lowest-income older homeowners.”

The study concludes that, while homeownership is not an answer for all older Americans, the housing industry should still strive to “create homebuying options that not only are affordable in the short run, but buffer these new buyers from the significant downside risks associated owning a highly leveraged asset.” Also, once these consumers sell their houses, it is important to give them affordable housing options for their next life stage. While many will benefit from increases in home equity, it is important to have sources of retirement income from those who will not. “The inability of all households to realize the benefits of homeownership leaves behind gapping holes in the retirement security safety net.” [Return to top]