Home Ownership Key in Retirement
Taken from Daily Real Estate News / Monday, November 14, 2016
Older home owners who leverage the equity in their home may be better off in funding their retirement, according to a new study by the Urban Institute. However, the recession may have hampered many retirees’ abilities to do so.
“Not only does a house meet the basic needs of shelter, but it’s an asset that typically can be used to build wealth as home owners pay down their mortgages,” the study’s authors note. “In fact, many retirement security experts argue that the conventional three-legged stool of retirement resources—Social Security, pensions and savings—is incomplete because it ignores the home.”
Before the recession, home owners aged 65 or older could have used their home’s equity to increase their retirement income by over 50 percent – up to $60,000 –either by borrowing a home equity line of credit, selling their home at a profit, or taking a cash-out refinance or second mortgage. However, the Urban Institute’s study notes that percentage fell to 50 percent – up to $49,000 – by 2012, even though retirees accumulated an average 10 percent more equity than in 1998. Home owner’s equity grew from $117,000 to $166,000 between 2000 and 2006 before falling to $129,000 by 2012.
The swings not only parallel the movement of the market—according to the study’s findings, equity patterns follow mortgage debt trends, as well. From 1990 to 2006, national mortgage debt grew to $11.3 trillion from $2.5 trillion, then fell to $9.9 trillion by 2015; for the average older homeowner, debt grew from $44,000 to $82,000 between 1998 and 2012.
Mortgage loan-to-value (LTV) ratios also moved in tandem; in fact, the proportion of older homeowners with LTV ratios at 80 percent or more doubled from 1998 to 2012, according to the study. The proportion of underwater homeowners tripled over the same period.
Older homeowners today have more favorable retirement conditions, but not without contingencies. Low-income and minority homeowners tend to have most of their wealth tied up in their homes, but accumulate the least equity overall, according to the study—with loan approval related to income, these segments could become challenged, even though they have the potential to increase their retirement incomes considerably more so than other higher-income or majority groups. Low-income and minority homeowners, the study’s authors postulate, will likely rely on Social Security as their primary source of income in retirement.
The study’s authors say that older home owners have more opportunity to unlock the wealth potential of their homes in retirement, particularly now with the recession over.
“The majority of older adults, regardless of income, race and ethnicity, and education, own homes that they could use to help finance their retirement,” the authors note.
Source: “Study: Home Equity Still a Retirement Failsafe?” RISMedia/Urban Institute (Nov. 13, 2016)
Source: Urban Institute