How the Housing Market Affects Your Retirement Plans

Posted May 15th, 2012
by Isabell Davila (no comments)

Seniors looking to retire now are facing financial difficulties due to the state of the housing market in America. When the Baby Boomers purchased their houses early on, they bought during a time when the market was in its optimal state. Now, they owe up to hundreds of thousands on a mortgage they will be paying off for the rest of their lives. This puts their retirement funds at stake as well as adding a burden to a time of their life when they should be relaxing and enjoying life.

The Current Problem

Retirees with expensive homes are saddled with long-term mortgages that will have to be paid off by them or their children. mentions Charlotte Morse, age 62, who bought a two-bedroom house in California for about $450,000 in 2005. But the value plummeted by 42%, the estimated worth of the house sunk to about $260,000. However, Charlotte still owes $333,206 on the mortgage. Although she and her husband would like to move to North Carolina for retirement, they both know that dream will never come to fruition as they can’t pay off their mortgage in time, even if they were able to sell the house (which is even more unlikely). Charlotte is not the only unfortunate homeowner in this dilemma.

According to Alicia Munnell, director of the Center for Retirement Research at Boston College, 30% of the baby boomers aged 50-62 borrowed against the value of their homes between 2001 and 2004. This accounts for the significant decreases in net worth – as much as 35%. The game switches from exciting retirement plans to “which lives longer, the homeowner or the mortgage?” In this case, many of the boomers will not outlive their mortgages. Because of the hefty house payments, 23% of interviewed baby boomers said they planned to work until they are 70 or older and a depressing 12% did not expect to retire at all.

The only positive aspect of the current housing market situation is that those who manage to sell their homes have much cheaper options for retirement housing in states ravaged by the market decline. The hope however, is that the market would recover long enough for the retirees to get out from under their weighty mortgages and find cheaper residency.

Retirement Solutions

For some elderly homeowners, shared-appreciation is becoming a popular option. Shared-appreciation is an arrangement that involves an exchange of future home value in return for fast cash. Usually the cash represents 10% to 15% of the property’s current value, which gives the seniors some protection against the market relative to the value of their home.

Still others have resigned themselves to working an additional 10-20 years after their expected retirement date. Not only does the income help with pricey monthly payments, but it usually provides the opportunity for refinancing mortgages. Furthermore, delaying the inevitable collection of Social Security means higher payouts later on. Although these options certainly put retirement plans on hold or delay them for a while longer, it can mean the difference in never retiring at all or being stuck in an oppressive situation for years.

Additional Factors

In addition to the difficulties associated with high mortgage rates and decreased home value, seniors face more specific troubles when choosing alternative locations for living out the remainder of their days. The elderly folks can’t just settle down anywhere; many of them will be unable to drive in the near future and will need public transportation or living quarters close to local amenities. Those dependent on Medicaid or Medicare will also have to consider where they can get health care without having to travel long distances. Although many of these seniors envisioned living near their children and grandchildren, sacrifices will have to be made.

The best hope the retirees have is that the market will recover in the next 5-10 years. Although there is no guarantee that the market will indeed recover, or that this change will be nation-wide, the NASDAQ has reported a positive verdict for the month of May indicating that the index has jumped to 29. Considering economists predicting it to reach about 25 or 26, this is an encouraging report. This first step in recovery is partly brought on by the demand for rental properties, young people, and immigrants.

Renting relieves the oversupply of homes currently for sale and this demand provides a strategy option for retiring homeowners who want to get ahead of the game. By renting out their properties, it retains the value of the home over time while still covering mortgage payments. This would allow the seniors to find cheaper residency options, perhaps even renting themselves at a lower monthly cost, and reduce the risk of foreclosing on their homes or throwing out all hopes for retirement.

Categories: Advice

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