Demographic Trends, Housing Equity, and the Financial Security of Future Retirees

Housing equity accounts for a large portion of the non-pension assets of most retirees. We consider how home ownership, housing equity and housing value have changed in recent decades and, in particular, how housing equity has changed near retirement age. We also consider what these changes suggest about the feasibility of forecasting future housing market activity and home equity of elderly households. We find that the age profile of home ownership rates has changed little over the past two decades. This stability suggests that predictions of how demographic trends will affect the number of homeowners can be made with some confidence. On the other hand, there have been very large increases in the value of owner-occupied homes and in home equity over the past two decades. These increases appear to be the result of many factors that affect housing markets, including but not exclusively demographic trends. The wide variation in house values suggests that it is likely to be very difficult to forecast the future value of homes based on the past age profile of home values and projections of future demographic structure. We use cohort data to compare the home value, home equity, and mortgage debt of cohorts approaching retirement over the past 20 years. We also simulate the evolution of home values over the course of a typical retirement to explore the relationship between home equity at retirement and home equity at older ages. We compare the home equity of past retirees to that of those who will retire in the near future. Recent retirees have both more home equity and more mortgage debt than past retirees, which suggests that they are likely to hold more home equity at older ages than past retirees. Cohort data also show that over a 20-year period marked by very large increases in home equity, the ratio of home equity to total non-pension wealth remained remarkably stable. This empirical regularity leads us to consider whether projections of the home equity of future retirees might be based on forecasts of the wealth of future households. The recent turmoil in the housing market adds interest to such projections but also draws attention to the large changes in home value and home equity that can occur over a short period of time.