Most Baby Boomers, myself included, are relying on home equity as a critical part of our retirement funds. But how valid is that assumption?
The underlying premise is that we can always tap our home equity, either through low-interest loans or by selling our homes at a profit. Unfortunately, this may not be true.
For one thing, the value of our home equity is directly related to the health of the national economy. We all remember what happened in 2008 when the Great Recession hit. Everyone saw a large portion – if not all – of their home equity evaporate. And it could happen again.
More and more economists are predicting an economic downturn next year. The world economy is not as strong as many believe. According to Google, ” In an August 2019 survey of 226 economists conducted by the National Association for Business Economics, 38 percent of respondents said they believe the U.S. will enter its next recession in 2020, and 34 percent picked 2021; only 14 percent say it will occur after that.”
Home equity is one of the first victims when the economy goes south. The IMF believes worldwide economic growth is slowing down. This will affect all countries and negatively impact U.S. home values.
There is also the trend of fewer first-time buyers entering the marketplace. According to MarketWatch, “Zillow says 34% of all owner-occupied homes in the U.S. are owned by people aged 60 or older. Millions of these homes will hit the market over the next two decades as senior boomers either die, move in with their children or to an assisted living facilities. The problem: There are too many homes to be absorbed by Gen Xers. This suggests that prices will have to fall.”
And finally there is the issue of climate change. Certain areas, such as Florida, are going to become less popular as the fear of buying property doomed to become flooded takes hold. Ditto for locations that are fire-prone or subject to super tornadoes or extreme blizzard conditions.
The Bottom Line for Baby Boomers
The bottom line for Boomers counting on home equity to finance a large portion – or all – of their retirement is that you may want to act sooner rather than later to shore up your nest egg.
Selling at market peak and then buying a retirement home once values have plummeted is always a better strategy than what happened to too many of us in 2008 when we suddenly found our ourselves upside down on home equity and had to postpone retirement.
The same caution applies those who plan to remain in their homes during retirement. If you are thinking of refinancing or establishing an equity line of credit, now may be the time to take action.
Only you can make decisions about your unique situation. Just be sure you are making an informed decision.