Homeownership is one of the more viable paths to a secure retirement—but many older homeowners missed the prime opportunity to leverage that equity before the recession. How much usable equity can older homeowners now expect in retirement, given the rebound in home values?
A recent study by the Urban Institute explored the answer to this question, analyzing the equity patterns among older households before, during and after the recession.
“Not only does a house meet the basic need of shelter, but it’s an asset that typically can be used to build wealth as homeowners pay down their mortgages,” the study’s authors state. “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.”
Homeowners aged 65 or older, according to the study’s findings, could have used their home’s equity to grow their retirement income by over 50 percent (up to $60,000) pre-recession, either by borrowing a home equity line of credit, selling their home at a profit, or taking a cash-out refinance or second mortgage. That percentage dropped to 40 percent (up to $49,000) by 2012, despite accumulating an average 10 percent more equity then than in 1998. Home values, still, grew 3 percent by 2014. Monetarily, the average older homeowner’s equity stake increased from $117,000 to $166,000 between 2000 and 2006, then decreased 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.
Older homeowners overall, however, have more of an opportunity now to unlock the wealth potential of their homes in retirement, even with the recession in the rearview. Their prospects, as the study demonstrates, lean on home value, as well as mortgage debt. State the study’s authors, “The majority of older adults, regardless of income, race and ethnicity, and education, own homes that they could use to help finance their retirement.”