Harvard Study: Home Equity Will Be Critical for Aging Americans

Households with housing cost burdens have reached an all-time high, and many households led by those in the senior age demographic have failed to recover from the financial crisis that began in 2008. This has exacerbated the need for affordable and accessible housing and in-home care, and the ability to build home equity will be critical for seniors in addressing the financial issues mounting for American seniors.

This is according to a newly-released study by the Joint Center for Housing Studies (JCHS) at Harvard University, titled “Housing America’s Older Adults.” The 2019 edition of the report goes into detail concerning the aging that is taking place in America’s households, along with ways that financial disparities can be addressed, which includes the potential employment of home equity.

Jen Molinsky, a lead author on the study, also details how greater employment of home equity can serve as one possible solution for seniors facing financial and housing-related shortfalls.

The ‘silver tsunami’ is real, and the impact of home equity

Between 2012 and 2017, the number of household heads in the United States that were at least age 65 increased from 27 million to 31 million. Over the course of the next 20 years, the number of households led by someone in the senior demographic is expected to increase even further, according to the study.

“Over the next two decades, the growing population in the oldest age groups will lift the share of all U.S. households age 65 and over from 26 percent in 2018 to 34 percent in 2038,” the study reads. “The Joint Center for Housing Studies projects that the number of households aged 75–79 will increase 49 percent in 2018–2028, to 8.9 million, and by another 20 percent in 2028–2038, to 10.7 million. The number of households age 80 and over will grow even more rapidly, rising from 8.1 million in 2018 to 12.0 million in 2028 to account for 9 percent of all households.”

Additionally, a growing concentration of older households is already beginning to have a significant impact on housing stock, and as Americans continue to get older, their residential mobility drastically decreases. Only 3.6% of individuals in the 65-79 age group relocated to a new dwelling between 2017-2018, and that figure decreases even further down to 2.9% for those aged 80 and older, according to the U.S. Census Bureau’s Current Population Survey (CPS).

While levels of wealth differ greatly between senior homeowners and renters, perhaps the biggest difference-maker between the two is the ability to accumulate home equity.

“The ability to build equity puts homeowners far ahead of renters in terms of household wealth,” the study reads. “In 2016, the median owner age 65 and over had home equity of $143,500 and net wealth of $319,200. By comparison, the net wealth of the same-age renter was just $6,700.”

While homeowners are more wealthy than their renting counterparts, they are also not immune to significant financial hurdles, many of which can come in the form of mortgage debt maintained into retirement.

The impact of housing debt on retirement stability

In terms of homeowners carrying mortgage and other kinds of debt well into retirement years, there has been an observable trend in that direction for years. However, in 2016, nearly half of homeowners (46%) between the ages of 65-79 maintained mortgage debt with a median balance of $77,000, according to the study. While the percentage of households with mortgage debt is much lower for those aged 80 and over (26%), between 2007 and 2016 the share of 80+ households with mortgage debt increased by 16%.

Some of the reasons why retirement-age households maintain mortgage debt may be strategic, according to an assertion in the study, responding to a low interest rate environment or a choice to keep making payments on low-rate mortgages so that they can make higher-return investments.

“Others may have recently refinanced, extending the term of their loans into their retirement years,” the study says. “Still, many older households simply lack the resources to pay off their mortgage debt.”

Housing cost burdens and mortgage debt specifically can also lead to the cutting back of spending in areas related to health and overall well-being, lead study author Jen Molinsky says in an interview with RMD.

“It’s a reality, and we do see that people who are carrying mortgage debt versus homeowners who have paid off their mortgage, they’re obviously paying much more per month for housing,” Molinsky says. “They’re much more likely to be cost-burdened, and to be in that unaffordable category of paying 30% or more of their income on housing. And then, that quite often leads to cutbacks in things like food, health care and transportation.”

Potential solutions for senior homeowners: community development, home equity

Addressing the increasing need for accessible housing and the ability to age in place will be essential to solving many of these problems, Molinsky says.

“The data shows that most people don’t move and they do tend to stay in their houses for a long time,” Molinsky says. “So, I think it depends on where you are, I think as people age into their 80s and beyond, we typically see a greater need for services and transportation other than the car they may not want to drive anymore. So, with a lot of people aging in low density locations, that’s a concern.”

This isn’t an issue that can necessarily be solved by older people moving out of their homes, but thought must be given to ways in which older people can make their own homes more appropriate for them as they age, she says.

“Some of it [is related] to things outside the home, the infrastructure, community and services. Some of it [rests] in the physical structure of the home.”

Making communities more age-friendly can be a helpful component in finding a long-lasting solution to the issues that people will face as the larger population ages. AARP in particular has spearheaded initiatives across the country, encouraging communities to join an in-house network of age-friendly places that engage older adults with employment and volunteering opportunities, developing new housing and transportation options, and creating new services to support older adults living at home, the study says.

Cost can still be a major hurdle, however, and Molinsky acknowledges that home equity can play a major role in alleviating the increasing prevalence of aging-associated financial burdens for senior homeowners.

“I don’t think we know enough [yet] about where society is going, but it is true that fewer people have pensions,” she says. “So, I think there’s a good reason to think that home equity becomes an important source of money for people who don’t have those pensions or haven’t been able to save up in their 401K or IRA.”

Article by Chris Clow on reversemortgagedaily.com