Baby Boomers 'Under Water'

By Bob Tedeschi, The New York Times

March 13, 2009

A recent report suggests that the housing-market slump is hitting baby boomers particularly hard: many middle-aged homeowners had been so seduced by the rising prices of years past that they failed to save for retirement and may now owe more than their homes are worth. 

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The Center for Economic and Policy Research in Washington, which released the report last month, estimated that 30 percent of homeowners aged 45 to 54 were in this predicament, known as being “under water.” (About 15 percent of older baby boomers, 55 to 64, fell into that category as well.) 

So, if these people were forced to sell their homes now, they would have to bring cash to the closing. 

The center’s report also found that baby boomers in the 45-to-54 group saw their overall net worth plummet by about 45 percent over the last five years, to a median level of $94,200 from $172,400. 

While the drop partly reflected the meltdown of Wall Street, Dean Baker, the co-director of the Center for Economic and Policy Research, said that conservative estimates showed that home equity accounted for about $20,000 of the net income figure. 

Another factor that has led to a decline in personal wealth is what the report calls “the near zero level of savings nationally” from 2004 to 2009.

“As a result of the bubble-inflated values of their homes, tens of millions of families opted not to save during what would typically be their peak saving years,” the report said.

The center used 2004 consumer finance data from the Federal Reserve Board that measured a typical consumer’s wealth in several categories, including stocks and home equity. Researchers then reduced those values in accordance with the drop in the Standard & Poor’s 500-stock index and the median sale price of a house as tracked by the National Association of Realtors. The November S.&P./Case-Shiller 20-city price index was also factored into the projections.

Mr. Baker said he suspected that fewer baby boomer homeowners were under water in the New York metropolitan region than in other parts of the country, particularly areas where prices have fallen sharply, like Florida, Arizona and Rust Belt states like Michigan and Ohio. But he said that because of the financial industry’s persistent woes, owners in the New York area could see more significant declines in home prices this year.

Indeed, many areas in the region are already suffering. According to a report this month by Integrated Asset Services, a Denver-based real estate consulting firm, prices in Fairfield County, Conn., have dropped 42 percent since their peak in 2006, while prices in Passaic County, N.J., have dropped 26 percent.

Those homeowners around age 60 whose mortgages are under water, and who might now be considering selling, should carefully weigh their options, said Richard E. Austin, a financial adviser with Lincoln Financial Advisors in Rye Brook, N.Y. Selling the house would cost them money, he noted, which could mean that they might need to liquidate other assets — even retirement savings plans like 401(k)’s.

But Mr. Austin said that if these homeowners expected real estate prices to decline for years, and if they wanted to retire someplace other than their current home, selling now could shield them from deeper losses in the future. 

“I wouldn’t recommend that as the first option, because I’m more of an optimist,” Mr. Austin said, adding that a better option might be to rent out the house while waiting for home prices to rebound. 

Even baby boomers who aren’t under water could have a more difficult time affording retirement. According to the center’s report, five years ago, the median baby boomer household, with people aged 45 to 54, had enough net assets to generate about $14,000 in annual interest once the homeowners reached age 65. 

Now, that figure is just under $8,000.

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