With real housing prices falling at a rate of approximately 1.5 percent, the Center for Economic and Policy Research predicts that most Baby Boomers will be financially devastated if the housing crunch continues to 2009.
The study entitled, The Housing Crash and the Retirement Prospects of Late Baby Boomers, tracks wealth for families headed by people aged 45-54 from 2004 through 2009. Findings are that the destruction of housing wealth since the mid-year 2006 is more than $4 trillion in real wealth or as much as $50,000 for every homeowner in the country. Home prices continue to lose as much as $300 billion a month in household wealth, although that number appears to be slowing.
What this amounts to is that primary residence owners had a median net income of $74,000 in 2004 with a net worth of $230,000. Loss calculations are projected to be between 17.8 percent and 37.4 percent. In other words, median boomer households could enter 2009 with as little as $144,000 in total net worth, according to the authors.
For boomers, that's a problem because household wealth is one of the three so-called legs of the retirement stool. The other two are employer pensions and Social Security. Most companies no longer provide pensions. Social Security, although inflation-adjusted, was never intended to be more than a supplement to retirement income.
But will such worst-case scenarios really come to pass?
The authors argue that the majority of boomers will enter retirement with little wealth outside of Social Security. They make the case that any cuts to Social Security and Medicare benefits would impose "serious hardships on this age group" because of the devastating effects of the housing crisis.
While it's true that many boomers will enter retirement with little wealth, they may have more housing wealth than the Center's research shows they will have.
The authors based their worst-case scenarios on the negatively-biased Case-Shiller Indexes. From April 2007 to April 2008, the Case-Shiller 20-city index says home prices were down over 15 percent.
Constrast that outcome with figures from the Office of Federal Housing Enterprise Oversight, which oversees Fannie Mae and Freddie Mac. OFHEO says home prices have receded 4.6 percent from April 07 to April 08.
If housing losses were to extend at the OHFEO rate through 2009, boomer net worth would be reduced to about $208,000, a loss of $22,000.
Another point that is not included in the report is what would happen if housing turned around, as the National Association of Realtors expects it to.
In its latest forecast, the NAR says the aggregate median existing-home price is likely to decline 8.4 percent in the first half of this year, and then begin to stabilize in the second half before rising 4.4 percent next year to $213,900.
Just to tilt the numbers, let's throw in all of NAR's losses last year -- 1.4 percent. So if you add negative 1.4 percent and 8.4 percent and then the 4.4 percent gain, you have a two-year net loss of 5.4 percent. Your net worth is now about $218,000, or $12,000 less than it was in 2004. And that's with no raises, no other investments and no other savings.
Plus, housing always recovers to produce one to two percent gains above inflation levels.
Any boomer can appreciate the Center's efforts to keep Social Security and Medicare benefits at their current levels. But I wish they woudn't use housing scare tactics to argue the point.