Posts Tagged "home equity"

Top of a house

Retirees’ Home Equity: Useful but Unused

Many older Americans could benefit from using home equity for some much-needed income in retirement. But they have found many reasons not to.

Some want to preserve that housing wealth for their kids. Others don’t like the idea of cashing in on the equity if it means relocating to a smaller house or apartment or a less expensive neighborhood. They also have plenty of concerns about federally insured reverse mortgages, which are a way to extract equity but are complicated to understand.

These doubts, expressed in readers’ comments on recent articles, are persistent. But economists see things differently: home equity has great potential to ease retirees’ financial problems – after all, roughly $8 trillion of wealth is locked up in older people’s houses.

K. Friesen is a rare reader who agrees. She said a couple women in her family are proof of the benefits of deploying home equity. Thanks to a reverse mortgage, her aunt had “a roof over her head until she died at age 97,” Friesen wrote in a comment posted to “Tapping Home Equity – Retirees’ Relief Valve.” The article described a study demonstrating that using home equity is effective in reducing financial hardship.

Now Friesen’s mother has a reverse mortgage. “If she can squeeze every dime out of the little she has to have a better quality of life, I’m all for it.”

The advantage of reverse mortgages is that they don’t have to be paid back before the homeowner dies – the catch is that the borrower must continue to live in the house. A potential downside, as a reader noted, is that if a retiree has to sell the house and pay the loan back, the balance and accrued interest will have depleted equity.

But in fact, selling in retirement is an unlikely scenario. Nearly three out of four older workers either don’t move out of their current home or, when they retire, they sell their house, buy a new one, and stay put, according to research featured in “Most Older Americans Age in their Homes.”

Granted, these homeowners tend to be healthier than the older people who move around more. But Paul Brustowicz said even retirees who have health issues want the same thing as everyone else: to age in their own homes. …Learn More

Last will and testament

Retirees Intent on Leaving Homes to Kids

Every year, older homeowners leave billions of dollars worth of the wealth locked up in their houses to their adult children.

This is a paradox if one considers that home equity is one of retirees’ primary assets and could be a crucial source of income for people who are “house rich and income poor.” Retirement experts searching for an explanation have long wondered whether the deceased had intended to leave the house to family or simply died before they were able to cash in on the equity and spend it.

A new study has an answer: retirees have every intention of letting family members inherit their homes. The people in the study who expressed a stronger desire to leave an inheritance of at least $10,000 were much less likely to sell their homes before they died – with the intention that the house would be part, if not all, of that inheritance.

The foundation for this study is a precise estimate of the housing decisions being made in the final two years of life from a survey of older Americans. The researchers counted as many people as possible, including the deceased – their final living status came from interviews with next of kin – as well as people who continued to be homeowners after going into hospice or a nursing home.

The homeownership rate in the older population peaks around age 70 and starts falling precipitously after 80. But when the elderly in the study died, about half of them still owned their homes, while the other half had sold them and moved into rental housing.

At younger ages, the retirees had been asked to estimate the probability, from 0 (no chance) to 100 (definitely), that they would leave a financial inheritance. Based on this information, the researchers found that those who had said they had a high probability of leaving an inheritance remained in their homes.

There is also a financial advantage to the owner of not selling the house to avoid the capital gains tax, especially if the price appreciated dramatically during their lifetimes. The researchers didn’t account for this incentive in their analysis.

But they did find that the desire to leave a bequest is so compelling that parents held on to their homes even after predicting they might need to pay for nursing home care within a few years. …Learn More

A group of millennials

Black Millennials’ Wealth is Sliding

Black Millennial Figure

It’s still too early to assess the full impact of the COVID-19 downturn on Millennials’ economic fortunes. But Black Millennials had already lost a lot of ground before the pandemic hit their communities hard.

Their wealth in 2019 was just half of what would be expected based on how much wealth their parents’ generation had at the same age.

Other Millennials are also running behind previous generations, but only slightly. And their situations have improved in recent years, while Black Millennials are sliding farther and farther behind.

The Federal Reserve Bank of St. Louis called the situation “alarming” in its new report.

The oldest Millennials are turning 41 this year. But in 2019, the typical Black family born in the 1980s had only $5,000 in their savings accounts, 401(k)s, home equity and other wealth – compared with the roughly $11,000 they would be expected to have based on the previous generation. Hispanic Millennials had $22,000, and whites had $88,000.

Black Millennials are struggling for a few different reasons, said Ana Hernández Kent, a senior researcher for the St. Louis Fed’s Institute for Economic Equity. Homeownership is a major source of wealth for most Americans, but only a third of them own homes – half the rate of their white peers.

Student debt is another big issue, because African-Americans who borrowed money for college either didn’t graduate or used the loans to attend lower-quality for-profit colleges at disproportionate rates. Their college experiences haven’t always translated to earnings that are high enough to justify the debt taken on to pay for an education.

“They’re over-leveraged,” Kent said. “Just over a third of Black Millennials with at least a two-year degree are more likely to say the costs of college are larger than the benefits.” …Learn More

Rewriting Retirement

A Laid-off Boomer’s Retirement Plan 2.0

Jennifer Lee quoteJennifer Lee wanted to work until 70 to max out her monthly Social Security checks – at least that was the plan before she was laid off three years ago from a Washington D.C. church.

The church’s newly hired pastor “decided he wanted a whole new staff,” she said. “I felt to a degree he was entitled to do that,” she said – except that “he was only eliminating people on the staff who were over 60.”

She wasn’t having any luck finding a new job and felt that her only choice was to sign up for Social Security at 63½ to pay her bills. Eventually, Lee, a one-time nurse and medical administrator, landed a nice part-time job as a Jack-of-all-trades in an oral surgeon’s office. Post-pandemic, her duties have expanded to include overseeing the COVID-19 safety protocols.

The recession is putting many baby boomers in a predicament similar to Lee’s: a layoff has derailed their plans to work full-time to build up their retirement savings. Since March, the unemployment rate for Americans who are at least 55 years old has more than tripled, to 9.7 percent in June.

“Most older people, when they’re laid off, will take Social Security right away,” but “that’s not their best short-term solution,” said Wendy Weiss, a Cambridge, Mass., financial adviser. She urges them to find other ways to generate income or reduce expenses, because delaying Social Security increases the monthly check by 7 percent to 8 percent for each additional year the benefits are postponed.

But, Weiss acknowledges, the recession is putting growing numbers of unemployed boomers in situations that aren’t easily solved. “It’s not going to be pretty,” she said about the next few years.

Lee, who is 65, was fully aware she should have postponed her Social Security. But it took her more than six months to find her current job, and she didn’t have any unemployment benefits to tide her over, because church employers don’t usually pay into state unemployment insurance funds. She wasn’t old enough for Medicare at the time of her 2017 layoff either.

“I waited five months to apply for Social Security. I waited as long as I could,” she said.

She sees a problem not in the difficult decisions she’s had to make but in a shortage of policies for older workers like herself, who may be more vulnerable to layoffs and also can have a tougher time finding a new job even in an expanding economy. …Learn More

Map of South Central

Examining the Black-White Wealth Gap

The Black Lives Matter protesters have brought renewed attention to the enduring economic inequality that separates Black and white America.

Homeownership is at the heart of this disparity.

For many Americans, their largest source of wealth is the value they have built up in their homes over time. The house is also traditionally the primary way for moderate- and middle-income parents to pass wealth on to their children.

But less than half of African-Americans own homes, and the ones who do have a fraction of the equity whites have due in large part to the nation’s long history of segregated housing, economists say.

Further, the tidal wave of foreclosures a decade ago reduced the already low homeownership in minority communities, which felt the brunt of the housing market collapse. The Black homeownership rate is just 42 percent – 5 percentage points lower than it was in 2000. White homeownership remained stable throughout the crisis and is now around 72 percent, the Urban Institute said.

Home equity is a big part of wealth graphThe upshot of this combination of fewer Black owners and less equity for those who own a house is that the typical African-American worker has $4,400 in home equity, compared with $67,800 for whites. The home equity gap accounts for about half of the Black-white disparity in total wealth.

A web of systemic reasons explain the home equity gap. Black homebuyers have more debt, in part because they are twice as likely to receive a mortgage with a high interest rate as white buyers with comparable incomes. …Learn More

How Does Your Wealth Compare?

Depressing or eye-opening?

An online tool tells you where you stand financially by stacking up your net worth against other Americans.

The calculator compares a family’s net worth – financial and other assets minus debts – with all other U.S. families. Homeowners can choose to include the value of their home equity in their total net worth – or not.

Older people have had more time to accumulate wealth, so the rankings are based on the age of the household’s primary wage earner. The comparison is made with 2016 data from the Federal Reserve Board’s triennial Survey of Consumer Finances, which is the gold standard for personal financial data.

Since family – not individual – data are being compared, people who live alone are at a disadvantage. They will be measured against households with more than one person working and accumulating assets.

The calculator is on the DQYDJ financial blog written by a computer programmer and a financial professional. The validity of the results was confirmed by an economist formerly with the Center for Retirement Research, which sponsors this blog.

It might be fun to find out how you’re doing. But use this online tool at your own risk! …Learn More