How Much Does Housing Affect Retirement Security? An NRRI Update

Housing wealth, a major asset for most households entering retirement, is determined by two factors: 1) the value of the house; and 2) the amount of mortgage debt. Since 2000, house prices have been on a roller coaster, soaring to new highs during the bubble, plummeting when the bubble burst, and then beginning a gradual recovery towards their long-term trend level. In contrast, housing debt for older households has followed a consistent pattern: more retirees are carrying mortgage debt than ever before and the value of the debt has increased significantly. This brief examines how trends in house prices and borrowing affect retirement preparedness in the National Retirement Risk Index (NRRI). The NRRI is based on the Federal Reserve’s Survey of Consumer Finances (SCF), which is conducted every three years. The current NRRI baseline uses data for 2013 (the most recent SCF). Our previous work showed that – even if households work to age 65 and annuitize all their financial assets, including their home equity – more than half are at risk of not being able to maintain their standard of living in retirement. The current exercise is to estimate the extent to which below-trend house prices and high housing debt contributed to the high percentage of households at risk in 2013 and what current trends suggest for the NRRI in the future. The discussion proceeds as follows. The first section describes the NRRI. The second section presents trends in house prices and borrowing, which show that – in 2013 – prices were still below their long-term trend, and debt levels were substantially higher for older households. The third section reports what the 2013 NRRI would have looked like absent the housing bubble, that is, a scenario with higher prices and lower borrowing levels. The fourth section considers what may lie ahead for house prices and borrowing, focusing on whether recent patterns are likely to be transitory or permanent. The final section concludes that the confluence of lower house prices after the bubble and greater borrowing was a key reason for the high percentage of households at risk in the 2013 NRRI baseline. Looking ahead, recent data suggest that house prices will fully recover, which will modestly improve the NRRI, but the future path of borrowing is less clear.