Home equity borrowers may have jeopardized retirement
Consumers who resisted the urge to borrow equity from their homes are doing a better job of saving for retirement than those who didn't, a new study shows.
Consumers who resisted the urge to borrow equity from their homes are doing a better job of saving for retirement than those who didn’t, a new study shows.
House prices rose 60% between 2000 and 2007, before the housing bubble burst, according to an analysis by the Center for Retirement Research at Boston College in Newton, Mass.
Consumers who pulled the equity from their homes and consumed all their borrowings will be left with additional debt and no additional assets and probably will be worse off in retirement. Conversely, those who didn’t borrow and consume their equity will have more housing wealth to tap in retirement and will be better off, the study found.
The concern, the paper showed, is that some consumers counted on their home equity as part of their retirement savings. That is a dangerous way to save for retirement, some advisers said.
THE HOUSING BUBBLE
The September report, “The Housing Bubble and Retirement Security,” showed that households that experienced larger gains in their homes’ value relative to their income had a higher probability of taking cash out. But households with more debt were less likely to extract equity, suggesting that “households may sense they are not as rich as their house appreciation suggests,” according to the report.
Homeowners with children were more likely to extract equity, perhaps to pay for their children’s education and other expenses, according to the analysis.
The study showed that households responded to the extraordinary growth of housing prices by increasing their debt. The analysis showed that households extracted 18.8 cents and consumed 6.4 cents out of every dollar of increased home values.
“Housing booms are good things for consumers because they can extract equity without hurting their balance sheet. But when housing booms are followed by housing busts, many households will have borrowed against gains that they may never realize. Hence, housing bubbles can damage balance sheets,” according to the study.
The fear is that some clients considered their house’s equity like an ATM that could be used to help pay for children’s education costs, as well as other expenses, said Jim Holtzman, an adviser with Legend Financial Advisors Inc. of Pittsburgh, which manages about $300 million in assets.
“I don’t include real estate in the planning process. There’s too much uncertainty,” Mr. Holtzman said.
“It’s a liquid asset. You’ve got to be careful,” Mr. Holtzman said. “It doesn’t make any sense to base retirement on real estate.”
Mr. Holtzman talks to clients about downsizing to smaller houses or condominiums, but said that right now, he is suggesting that clients hold off trying to sell their houses.
Any equity from a person’s house isn’t counted for retirement calculations, said adviser George Papadopoulos, a Novi, Mich.-based sole proprietor.
He runs a practice with about 25 clients who are executives in their 30s and 40s and still have at least 20 years before retirement. While Mr. Papadopoulos declined to disclose his assets under management, he had $8.4 million in assets at the end of January, according to regulatory filings.
“I always hold to the philosophy that you buy homes to live in and not for investment,” he said. “People who were planning to do this have a mess in their hands and they probably cannot retire now.”
CHANGING THEIR MINDSET
Clients who are used to investing additional money in their house are changing that mindset, said Judy McNary, an adviser with McNary Financial Planning LLC in Broomfield, Colo., which doesn’t manage assets.
She is encouraging some clients to put any extra money in retirement savings rather than in extra house payments. Some clients who were hoping to sell their houses or to use their houses as part of their retirement nest egg are now waiting, Ms. McNary said.
She had one client who was paying hefty mortgage payments to try to pay off a house with a 15-year mortgage, but wasn’t funding retirement accounts fully. Ms. McNary advised the client to refinance to a 30-year mortgage so the extra money could be used for retirement savings.
“That was a philosophical shift,” she said.”
Ms. McNary’s average client has $750,000 to $1 million in assets.
Even though some clients are holding off selling houses or even delaying retirement, she said her clients are still upbeat.
“People are resilient,” Ms. McNary said. “We’re just resetting goals.”
E-mail Lisa Shidler at [email protected].
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