Magazine article Mortgage Banking

Is There a Crack in the Retirement Nest Egg? the Mortgage Industry Needs to Prepare for the Retirement Impact from a Massive Generation of Baby Boomers. Reverse Mortgages Are Definitely in Its Future

Magazine article Mortgage Banking

Is There a Crack in the Retirement Nest Egg? the Mortgage Industry Needs to Prepare for the Retirement Impact from a Massive Generation of Baby Boomers. Reverse Mortgages Are Definitely in Its Future

Article excerpt

In 2006 the first baby boomers will turn 60, and the first wave of a cohort estimated by the 2000 U.S. census to number nearly 83 million will soon begin to retire and leave the work force. Boomers have been the pig in the python for the past 40 years. Now they are moving closer to the tail of that python. [??] Meanwhile, the personal savings rate has fallen dramatically over the past 10 years, just when one might have expected boomers planning for retirement to be saving more. Does this mean that baby boomers are going to be woefully unprepared for retirement? Not necessarily. [??] Boomers are "saving" in the form of increased equity in their homes and other assets. Household net worth has continued to grow at a rapid clip, and now exceeds $50 trillion. The net worth of seniors (households headed by someone 65 years old or older) is estimated to constitute about 30 percent of this total. [??] As the baby boomers reach senior status, it is likely that they will control a growing portion of a growing quantity of total household wealth. So it appears, on the surface, that the wherewithal to finance boomer retirement should be adequate. After all, increases in net worth represent an ability to finance consumption in the future, when labor income is lower. In theory this sounds good, but there are a number of concerns.

First, consumer debt (primarily mortgage debt) is rising rapidly, even faster than net worth. Will rising indebtedness endanger boomer retirement plans? Second, reliance on asset-price appreciation only works so long as assets continue to appreciate. What happens if appreciation slows? And third, how will asset-rich retirees translate wealth into consumption without triggering sharp declines in asset prices (including home values) down the road?

Given the size of the boomer cohort, it is critical that the mortgage industry prepare for the impact boomer retirement will have on the U.S. mortgage market. Implementing strategies that correspond to possible outcomes requires a review of mortgage debt outstanding, investment strategies and the possible choices and attitude of a cohort that has been said to be "reinventing aging."

Mortgage market data: The Kennedy-Greenspan study and retiree real estate holdings

In September 2005, the Federal Reserve published a monumental study of the mortgage market, Estimates of Home Mortgage Originations, Repayments and Debt on One-to-Four-Family Residences, authored by Fed economists James Kennedy and the Federal Reserve chairman himself, Alan Greenspan (aka The Maestro). The purpose of the study was to develop a methodology to provide better data on the size of mortgage flows, including originations and repayments. The rationale for the study is Greenspan's belief that the mortgage market's large and increasingly important effects on overall economic activity merit resources being devoted to improving mortgage data.

One of the main conclusions of the study is that 80 percent of the increase in mortgage debt outstanding represents voluntary extraction of home equity ("home equity withdrawn," or HEW), which is used to bolster current consumption as well as pay down higher-cost debt or finance new investment. In fact, the entire recent observed decline in the personal savings rate can be attributed to consumption spending financed by home-equity extraction.

Of course, consumption spending financed by home-equity extraction begs the question: What happens if the rate of housing appreciation slows? From an economist's perspective, the presumption would be that slower housing appreciation would result in an increase in the savings rate as households seek to continue to preserve net worth increases.

Even as HEW has soared in recent years, the growth in housing values has been greater, so that remaining home equity is rising as well. Because seniors have a high homeownership rate and relatively low loan balance, this equity tends to be concentrated among older households. …

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