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Burns: For most Americans, retirement means placing a bet on home ownership

By Scott Burns, The Dallas Morning News
Published: March 10, 2024, 5:47am

Will you have too much house at the end of your money?

Odds are, you will.

“No, no, not me,” you say?

Well, think again. According to a recent examination of the distribution of household net worth by age that I did, only 5% to 10% of all households have other assets that are a significant multiple of their home equity.

Why is this important?

Simple. You need to have investments about equal to your home value to have the income to support the operating expenses of the house. That means, very roughly, that we need a home equity to financial assets ratio of at least 1 to retire, preferably substantially more.

So, yes, we can have too much of a good thing. And most of us do. We’re house-rich and earning asset-poor.

To understand this, we’re going to look at two different things. The first is the value of the equity in our homes. The second is how our home equity compares to the value of our other assets, net of debt.

  • Measuring the big balloon

Today, our houses are stunningly valuable. If you are a homeowner, your equity has soared. But is it real?

We can understand more by looking at the Big Data or the “boots on the ground” evidence we all see.

Here’s the Big Data picture. According to Federal Reserve figures, the equity we had in our homes doubled from $7.1 trillion at the end of the first quarter of 2000 to nearly $14.2 trillion at the end of 2006.

That’s a compound growth rate of 10%. A good time was had by all.

  • When the party ended

Then we had the financial crisis.

It took our collective home equity down to $8.2 trillion, bottoming at the end of the first quarter of 2006.

Boots on the ground evidence was brutal. Thousands of people lost their homes. Realtors had Foreclosure Safaris in Las Vegas. Unfinished homes were bull-dozed in Florida.

Since then, our collective home equity has quadrupled. It reached $32.6 trillion late last year. Talk about “wealth effects” – it’s hard not to feel flush when your home appreciates more than your salary.

The boots on the ground evidence also supports worry. Yes, homes are far more valuable. But how many buyers have the cash, income, or credit to buy them?

Today, millions of homeowners would not qualify to buy the house they already own at its current value. They don’t have the cash for a new down payment or the income to support the required loan.

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Worse, this isn’t a problem of the moment. It turns out that for most households – about 90% of them – home equity accounts for a large majority of their net worth. This is not new information. We’ve known for decades that buying a home was the largest purchasing decision that most of us ever make. We’ve also known that home equity is the bedrock of the American middle class.

  • What house-rich, cash-poor means in retirement

Without Social Security and pensions, most people don’t have enough in financial assets to support the operating expenses of their homes when they retire, let alone regular living expenses or a mortgage if they still have one.

  • How did I learn that?

It was easy. A proper academic study would likely have greater precision, but it’s possible to learn a lot, online, by going to the website www.dqydj.com. Among other things, the site takes the regular Federal Reserve Survey of Consumer Finances and presents the findings in very helpful ways.

One measure is the distribution of consumer household net worth by age. That’s the sum of all our assets, including the value of our homes, less any debt. But you can also ask for the household net worth less home equity by age. Do a bit of arithmetic and you find how much household net worth excluding home equity is as a multiple of home equity. It’s a whole lot of numbers.

I think the best way to understand the situation is by comparing the asset profiles of a top 5% net worth household and a median net worth household.

The top 5% households typically have a net worth of nearly $1.5 million by age 35 to 39. Of that, only $300,000 is the equity in their home. So their other assets – stocks, bonds, mutual funds, retirement accounts – are worth about four times their home equity. Add Social Security and possible future pensions and they are on track to a comfortable retirement. Over the years that multiple of home equity grows, topping out at nearly six at age 75 to 79. Net worth tops out a bit under $7 million at age 65 to 69.

The median household, by comparison, hits its maximum multiple of home equity of two at age 30 to 34. After that, it’s below one except for age 70 to 74. In other words, the other assets of the median household fail to grow faster than their home equity throughout their entire lives. Net worth tops out at $439,000 with about half in home equity at age 70 to 74.

Another way to compare households at different levels is to average the ratio of other assets to home equity through their adult lifetimes, age 30 to 80 plus. Here’s what that looks like:

—Median household: 0.8

—Top 25% household: 1.48

—Top 10% household: 3.16

—Top 5% household: 3.27

—Top 1% household: 11.5

As you can see, home equity is the Big Dog for at least 75% of all households. The only wealth level where home equity is a small portion of net worth is around the top 1% of households.

I think it’s safe to say that except for the rich, we’re all in this together. We’ve got huge bets on the homeownership horse.