Rising household wealth held by older adults in recent years have put today’s seniors in a better position to tap home equity for retirement purposes. But increasing housing debt among this population could hinder their ability to use home equity to improve retirement security in the future, according to new research from the Urban Institute.
“For most adults near traditional retirement age, a home is their most valuable asset, dwarfing retirement accounts, other financial assets, and other nonfinancial assets,” write Urban Institute researchers Barbara A. Butrica and Stipica Mudrazija in a recent report titled “Home Equity Patterns among Older American Households.”
The analysis is based on the Health and Retirement Study (HRS), a national survey of Americans age 51 and older that is sponsored by the National Institute on Aging and conducted by the University of Michigan.
“Current housing trends suggest today’s older homeowners are even better positioned to use their homes for extra income and more retirement security than they were just two years ago,” write Butrica and Mudrazija.
While homeownership rates in the U.S. fell steadily from 1998 to 2012, the homeownership rate of adults age 65 and older increased 1.9%—from 79.2% to 80.7%—during this period, according to U.S. Census Bureau data cited in the Urban Institute report.
But as homeownership trended upwards for older adults, their home equity levels mirrored changes in the economy, notably following the aftermath of the Great Recession.
In the run-up to the Recession, the typical owner-occupied household age 65 and older saw its home equity rise 42% between 2000 and 2006,—up from $117,000 to $166,000 in inflation-adjusted dollars. Home equity then declined 22% from 2006 through 2012 to only $129,000.
“Although today’s older owner-occupied households have significantly more housing equity than their predecessors, the size of their home equity relative to their total wealth has not changed much over this period, ranging from 51.2 to 58 percent,” the researchers state.
At the peak of the housing bubble, researchers noted that older homeowners could have increased their retirement income as much as 54% by tapping into their home equity. But after the bubble burst, when home values collapsed and housing debt continued growing, by 2012 older homeowners could expect to boost their retirement incomes only by 40% with the help of home equity.
Despite the decline in home equity since 2006, median home equity values for households age 65 and older were still 10% higher in 2012 than in 1998.
The Urban Institute report is the first in a series examining the role that home equity could play in improving retirement security.
As such, the researchers analyzed home equity patterns among older American households using both historical and recent data to examine how much home equity these households have, who taps into that equity, how much housing debt they have, and how these patterns differ over time.
In the research, the Urban Institute observed households taking actions that give them an opportunity to tap into their home equity, such as refinancing their mortgage or selling their home, among other methods of equity extraction, including reverse mortgages.
Looking at 2012 specifically, 9% of households borrowed against their Home Equity Lines of Credit (HELOCs); 3.9% refinanced their mortgage; 1.8% made money off the sale of their home; 1.7% took out a home equity loan; and 1% took out a reverse mortgage.
The median balance among households with home equity loans was $27,000 in 2012; whereas the median balance was $24,000 among those who borrowed against HELOCs; and those who gained money from selling their home achieved a median profit of $97,000.
“Of course, older homeowners’ financial prospects depend not only on their home’s value but also on their housing debt,” the researchers state.
Historically, between 1998 and 2012, researchers found the share of owner-occupied households age 65 and older without housing debt grew from 23.9% to 35%. Furthermore, the level of indebtedness nearly doubled from a median of $44,000 to $82,000 during this period.
“Debt levels continued to rise, though more slowly, after the start of the recession as people lost their jobs, incomes fell, and families struggled to make ends meet,” researchers state. “Rising debt and falling home values contributed to the decline in home equity between 2006 and 2012.”
Nationally, outstanding mortgage debt increased from $2.5 trillion to $11.3 trillion between 1990 and 2006, and then declined to $9.9 trillion in 2015. Meanwhile, the share of Americans with underwater mortgages declined steadily from 31.4% to 13.1% between 2012 and 2015.
But even so, researchers note that older adults, who have become “increasingly indebted” and “increasingly leveraged,” could face some challenges to their retirement security in the future.
This is especially true for low-income households. For example, between 1998-2012, the median amount of housing debt for owner-occupants carrying housing debt increased 86% overall, but grew 113% for low-income households.
“If these trends continue into the future, retirement security will increasingly depend on retirees having enough income and assets to pay for basic living expenses and to service their debt,” write Urban Institute researchers Butrica and Mudrazija.
Written by Jason Oliva