Homeownership is Not an Academic Exercise
Recent reports from the Harvard Joint Center for Housing Research and comments from Yale economics professor Robert Shiller, a prominent researcher on housing’s impact on the economy, question the wisdom of homeownership. With all due respect to these academic theorists, in the real world, where consumers reside, the positive impact of homeownership can simply not be overstated. Leaving aside the myriad non-financial benefits that accrue to individuals, communities and society in general from high levels of homeownership, homeownership is simply the single most important financial decision related to retirement.
Let’s first take a look at some selected facts related to retirement savings in the US as compile by Motley Fool:
- Only 42% of private sector workers age 25 to 64 have any pension coverage in their current job. That’s lower than the 50% who had pension coverage back in 1979.(Source: Center for Retirement Research)
- 30% of workers in a 2012 study reported that they had less than $1,000 in savings and investments. (Source: Employee Benefit Research Institute)
- A 65-year-old couple retiring in 2012 is estimated to need $240,000 to cover medical expenses throughout retirement. (Source: Fidelity Investments)
- One-third of households end up entirely dependent on Social Security; for low earners that portion is 75%. (Source: Center for Retirement Research)
- 21% of workers covered by 401(k) plans choose not to participate. (Source: Center for Retirement Research)
- A typical worker should accumulate about $363,000 by the time he or she retires. According to the Fed, a typical household approaching retirement had 401(k)/IRA balances of only $120,000 in 2010, far short of the projected amount for the individual. (Source: Center for Retirement Research)
- 60% of workers report that their total household savings and investments, excluding the value of their home and any defined benefit pension, is less than $25,000.(Source: Employee Benefit Research Institute)
So, less than half of workers today have any pension coverage, and more than half report that they have less than $25,000 in assets, excluding their homes. Now consider these facts:
- Home Equity represents 2/3 of the assets of those nearing retirement (Society of Actuaries)
- Average Equity of US Homeowners is 41% (US Federal Reserve)
- 60% of homeowners have no mortgage at all (US Federal Reserve)
- Average US Home Value is $180,600 (Case-Shiller Home Price Index)
The truth is plain to see. Homeowners have far greater assets in retirement than do non-homeowners. The reason is simple: not only do homes have the potential to grow in value, but most importantly, they are depositories of savings created through the disciplined repayment of mortgage loans. Whether or not homes represent the “best investment” is not the question that should be asked. Homes are far more than an investment. The better question is does homeownership substantially improve the financial position of retirees. The answer is clear, unless apparently, you approach it academically. Now…back to the real world.