Would an affordable housing market lead to a retirement savings crisis?

December 18, 2019 6:29 AM

My civic engagement network talks often about affordable housing in my town and state. However, I feel like I notice an additional aspect no one mentions - that many people have their retirement plans based on the housing prices being very high. Can you please help explain the aspects of this tension to me?

Many people who have houses are celebrating the rising prices of their houses. For example, my parents bought a house close to lake michigan at a foreclosure auction, lived and rehabbed it for ten years, and then sold it for enough money to complete their retirement savings.

It seems to me that many retirees are counting on the housing bubble to fill out their retirement plans.

When I bought my first house three years ago, it was 30% more than it sold for ten years ago. Many houses in this city are selling for 50% or 100% more than they sold for ten years ago. This is ridiculous and unaffordable, but is due in part to a very low housing stock. Low supply and high demand have raised the prices.

The suggested solution is medium density housing, massive investment in more options. People say this will provide affordable housing, but also lower the pressure on the market and reduce prices.

But what about the folks like my parents who need those high prices to complete retirement?

Wouldn't increasing supply "pop" the bubble, lowering housing prices across the city? Would an affordable housing market lead to a retirement savings crisis?

I'm sure this is more complicated than I think - can you please tell me what I might be missing, and what other factors impact this?

posted by rebent to Society & Culture (13 answers total)

No.

First, and most importantly, a "bubble" by definition means that the current valuation is not supported by underlying fundamentals. Inceasing the supply of housing is a slow, slow process and will not have much of a short-term effect on prices. In San Francisco, a city of about 900,000, only about 2,500 units are built each year. (That's no guarantee that prices won't drop, just that any drop won't be driven by increased construction.)

Also, to the extent that additional construction reduces costs, that means that young people buying now will have more money to save for their retirement.

Second, rising sales prices don't help people who don't sell their homes in retirement, and retirees typically don't.

Third, the whole concept of a retirement "crisis" is debatable. There are many older people suffering financially, just as there are many poor younger people. But the people at risk of being poor in retirement are not generally those who have a lot of home equity. (Again, there will be exceptions.)
posted by Mr.Know-it-some at 6:50 AM on December 18, 2019 [9 favorites]

There is a fair amount of research on this topic and it shows that increasing the affordable housing supply has no or only a negligible effect on the value of existing housing.

We are already in a retirement savings crisis. Most people nearing or in retirement do not have enough to fully privately fund a retirement (and they shouldn’t have to). A huge percentage of the senior population would be destitute without social security. There is a small slice of this group that is doing okay because the happened to buy a house at the right time.
posted by scantee at 6:58 AM on December 18, 2019 [5 favorites]

I can’t comment on the economics of how likely the situation you’re positing is to happen, but in terms of the “am I missing something” aspect of your question: I think the framing you’re approaching it from labels two things a crisis which are actually on very different orders of severity. The effect of one “crisis” is that people are homeless, underhoused, or poorly housed. The effect of the other “crisis” is that people with home equity will see a lower return on their investment. Looking at it this way should make it a lot easier to understand why people would be willing to make this potential tradeoff.
posted by dusty potato at 7:28 AM on December 18, 2019 [7 favorites]

A huge percentage of the senior population would IS destitute WITH social security. Elderly homelessness

Senior homelessness is a very very real thing and on the rise. Housing prices do not hedge against homelessness for the majority of people.
posted by AlexiaSky at 8:05 AM on December 18, 2019 [2 favorites]

A few things:

1. Rising real estate prices increase your paper worth, but that wealth isn't liquid--if you don't sell the house, you don't realize the increase in value. And if you do sell, where are you then going to live?
2. Worse, rising real estate prices also mean rising property taxes. This is a huge issue in my neighborhood, where folks who have lived for 50 years are suddenly seeing their houses valued at 1000% of what they were 20 years ago, but even though they own the property outright they can't cover the taxes on 10x the property value and are being forced to sell and relocate.
3. There's no bubble to pop this time around--lending restrictions are tighter than they were in 2008, so (nominally) houses are being sold to people who can afford the mortgage on them. The thing propping up prices isn't bad debt, it's the rising inequality between the top 10% of earners and everyone else.
4. A decline in real estate prices would most likely spark (or be caused by) a larger recession event. That's the thing the average pensioner needs to be worried about: a market crash would wipe out a significant amount of privately-held retirement accounts, in a way that disproportionately affects folks who have already or will soon retire.
posted by Mayor West at 9:13 AM on December 18, 2019 [4 favorites]

Worse, rising real estate prices also mean rising property taxes. This is a huge issue in my neighborhood, where folks who have lived for 50 years are suddenly seeing their houses valued at 1000% of what they were 20 years ago, but even though they own the property outright they can't cover the taxes on 10x the property value and are being forced to sell and relocate.

This is so overstated it's not even funny. Most cities have caps on taxes for those past 65, or the option to defer taxes until property disbursement, and plenty of states have serious caps on property tax, and another huge number of states barely tax property at all.

Also, it's pretty easy for those with massive property value increases to tap the value of that increase to pay taxes at rates even lower than current mortgage rates, ie less than 4%.

4. A decline in real estate prices would most likely spark (or be caused by) a larger recession event. That's the thing the average pensioner needs to be worried about: a market crash would wipe out a significant amount of privately-held retirement accounts, in a way that disproportionately affects folks who have already or will soon retire.

No not really. For one, Social security and pensions are the most common for that age cohort, not private investment accounts (also sizeable private taxable investment accounts are by far most common among the wealthiest in the US), and finally most should have heeded the advice to roll into less aggressive (and therefore less volitle in a recession) investments, and pension shortfalls have been backed by the Feds and state far more regularly than any other type of investment losses.
posted by The_Vegetables at 9:33 AM on December 18, 2019 [2 favorites]

Wouldn't increasing supply "pop" the bubble, lowering housing prices across the city?

The cost of property has almost nothing to do with the supply and demand of houses, it is based on the supply and demand of CREDIT. Thats because most people buy with a mortgage rather than buying outright in cash.
When the supply of cheap credit dries up, then the number of people able to buy at bubble prices will also dry up and prices will fall.
posted by Lanark at 10:43 AM on December 18, 2019

It seems to me that many retirees are counting on the housing bubble to fill out their retirement plans.

If they are, they should rethink things. Just like the stock market, the prices of homes cannot be expected to keep rising forever. We as a society should have learned that lesson 11 years ago.
posted by megatherium at 1:56 PM on December 18, 2019

Just an FYI - 401(k)s and IRAs are much more common than pensions nowadays even for retirees except for the extremely old and those who were in government service. I'm in my late sixties and every time there's a hiccup in the market I lose or gain substantial amounts of imaginary money (I'm not taking anything out so it doesn't exist as far as I'm concerned).

We own the house outright and its only value is if we should want to sell it to buy into a life care community. But yes, house prices can have an effect, and the worst one is in real estate taxes. If you own your house outright, you may not be paying a mortgage, but you can be priced out of your neighborhood pretty darn fast.

Whatever you do, though, don't let anyone take a reverse mortgage.

IMHO.
posted by Peach at 2:57 PM on December 18, 2019

One of the issues is that a lot of the houses owned and occupied by middle class and upper middle class white boomers -- folks in and entering retirement -- aren't the houses that younger folks want and can afford. A lot of those retirees live in the suburbs in very large houses, or at least houses larger than they need, especially as empty nesters. But further out suburbs are becoming much less desirable and millennials have a lot more debt and less savings than their parents, and they aren't as interested in a big house in the 'burbs. They'd rather live closer in in a smaller house. So, if folks in those big suburban houses want to cash out, they might find it difficult to find willing buyers, which could lower prices overall... but, even in this situation, there could still be very high demand for closer-in houses (for example, a bigger house in town might maintain its value). Which is to say, smaller homes in dense areas could maintain their price very well because there isn't enough stock as it is.

(This is a broad generalization and likely also reflects my west coast perspective.)
posted by bluedaisy at 5:10 PM on December 18, 2019 [1 favorite]

It would be a worry that suppressed property values across the board. I really don't think "affordable housing" proposals are getting anywhere near that though. Blunting the explosive growth of prices in the worst areas is not going to be the same sort of impact. Especially if you're not talking about people who bought in these areas just 5 years before retirement.

1. Rising real estate prices increase your paper worth, but that wealth isn't liquid--if you don't sell the house, you don't realize the increase in value. And if you do sell, where are you then going to live?

For young homeowners with growing families the rising prices hurt you, even if you own, for the logic you say--the gap between the home you have and the one with an extra bedroom that you want has grown. But this works in reverse for empty nest retirees no longer needing to live in a high priced area for work reasons. (I'm certainly assuming I'll move within the Bay Area but off the Peninsula, even though I love it, at some point when I'm done working.)

It's fairly common in my upper middle class, middle aged circle to see people's parents sell and downsize houses, sell and move to a different/better climate, sell and move to a cheaper area. You can also do a reverse mortgage or rent things out to get living money from your house. You can also sell and move into a retirement community. There are lots of ways to use a major asset to provide living expenses. (I don't know how anecdotal numbers translate to national frequency, but for example the article linked to above saying it's not happening as much seems to imply 40-50% of people are still doing it, and to some extent that decreases are people deferring.)

It's a fact that for a lot of Americans, due to the tax setup and cultural expectations, the home can be the major source of saved assets when you hit retirement. It's not the situation anyone should have designed but it's important for a lot of people not to collapse the prices.
posted by mark k at 10:29 PM on December 18, 2019 [1 favorite]

Where I am most retirees are really resistant to downsizing, and the home becomes mostly dead capital until a health crisis forces them to a nursing home, or they die and leave it to their kids. People who have owned homes for a long tend not to want to rent.

Housing policy is a peculiar way to support the retirements of seniors. It represents a transfer of wealth from younger people to older people, and given my point above, it doesn't necessarily improve the day to day living of retired people. (Can't sell .01% of your house to pay for groceries) Policies to increase housing prices are also regressive. The owner of the expensive home benefits more than the owner of a cheaper home from policies that increase home prices. But the goal should be to focus policy on people who need the help. The long history of redlining means that there is an unavoidable racial component to policies that increase the value of housing. Whiter, wealthier people benefit more from policies that increase house prices than people who are poor, or not white. Again, the opposite of what we want if the goal is to reduce poverty.

Also, consider people who experience job loss, divorce, medical crisis, or some other financial problem. These people are more likely to have to sell their home, and are likely to subsequently have more difficulty buying another one. If home ownership is an essential part of a secure retirement, then that first crisis also sentences the person to an impoverished retirement.

Instead, income supports like Social Security are more helpful, because they reach all seniors, rather than just home owners. And they can be targeted to people who need it.

In most of North America, we already have huge policies in place that advantage homeowners to the detriment of everyone else. Property taxes are kept low by shorting school and transit funding. Exclusionary zoning makes it more difficult to build necessary housing density in places that need it. All the flavors of NIMBYism.

In addition, here in Toronto, there is a huge mismatch between family size and home size. In the inner suburbs, there are a huge number of empty nesters in 4-5 bedroom houses. Their kids have moved out, but they stay in the home. Younger, growing families are increasingly living in smaller spaces, priced out from homes that are the right size, but unaffordable. There are big swaths of the city where population density is declining, even as the city as a whole is growing in population significantly. We shouldn't encourage people to stay in outsized houses because it's a good investment.

Policy needs to encourage the kind of medium density that is more affordable. Also important is the kind of housing appealing enough to seniors to get more of them to downsize.
posted by thenormshow at 7:51 AM on December 19, 2019 [1 favorite]

Where I am most retirees are really resistant to downsizing....

I have had about a half-dozen clients in the past years interested in creating a multi-generational living situation on their property. They have young kids, their parents are a certain age and live far away and want to live closer. I go through the options with their property but urge them to have a real conversation about square footage. In my city, accessory dwelling units are limited to a max 800 square feet. You can make a very nice one-bedroom unit with an accessible bathroom in that size but that fact right there has stopped many of these conversations dead in their tracks. Clients go to their parents and discuss it with them and it's just, 'no way.' Wherever they are living they bought many years ago, it's cheap and huge. The reality of downsizing just doesn't work for them.

Now, I wouldn't be super excited to go back to a living situation similar in size to my earliest years after college but you absolutely can do it. At the rate I'm going, I can't see myself acquiring the huge, chonky furniture that my parents have (and continue to buy). Everytime I fantasize about having a huge, beautiful, historic home, I imagine it filled with the IKEA I can afford and I'm totally put off. Being nimble in your life is the only goal as far as I can tell for the generations following the Boomers. There's no other choice.
posted by amanda at 7:44 AM on December 20, 2019