For the forseeable future there will be no easy way to build a retirement nest egg, meaning investment advisers and their clients will have to work harder and use a wider range of tools to accomplish the task.
The latest home sales statistics, released Tuesday, confirm that there will be no quick rebound in home prices. In fact, it's fast becoming clear that the days when workers could depend on their homes to fund a substantial part of their retirement are over.
When the housing bubble burst, it not only destroyed accumulated equity, it left millions of mortgages underwater. For these borrowers, not even a reverse mortgage is an option.
To be sure, prudent baby boomers, especially those who bought their homes 20 years ago and did not refinance or spend fortunes upgrading them, probably still have some equity in their homes. But not nearly as much as they had planned on.
In fact, in 1990 the average home in the United States sold for a little more than $150,000 in today's dollars. Today, it is worth just about the same.
For years, politicians and others urged workers to buy homes as a way to accumulate wealth. The home was correctly described as the biggest investment an individual or couple was likely to make.
However, very few warned that like other investments, homes not only rise in value, but can also fall.
Why should they have? After all, hadn't home prices steadily marched upwards since 1940, with only a few intervening periods where they retreated in a few locations?
That caused almost everyone to forget the impact of the Great Depression on home prices, and anyway, no one thought anything like the Great Depression could ever occur again. The government wouldn't let it. The
Federal Reserve wouldn't let it.
Those espousing the virtues of homeownership also forgot that not only was buying a home the biggest investment most individuals, or couples, were likely to make, but that it was a leveraged investment. Indeed, in purchasing a home, the vast majority of Americans were taking on more leverage than they would ever accept when buying stocks or bonds.
The encouragement of politicians, the urging of mortgage brokers and bankers and various government incentives, including low interest rates and the tax deductibility of mortgage interest, all combined to lead Americans to invest too heavily in housing, and underweight other investments, such as Treasury bonds, especially Treasury inflation-protected securities.
Without realizing it, they had put together undiversified investment portfolios, and such portfolios often lead to poor outcomes. And too many financial advisers did not spot the danger.
Now Americans will have to build their retirement nest eggs the old-fashioned way — by saving more, and investing more cautiously, and perhaps working longer.
They will need better guidance from their advisers as to how those savings should be invested than they have received in the past two decades.
