Blinding Flash of the Obvious

From the Chicago Tribune, we have: Banking on home dangerous.

First the byline: Americans spend too much money on houses and too little on retirement savings

No shit!

When Eva Polydoris looks back at the four decades before she retired, she recalls everything that stood in the way of amassing a comfortable level of retirement savings: At first, it was the usual struggles of life, like raising three children and putting them through college.

Then came financial setbacks, such as her husband's early death, substantial medical expenses that drained savings, caring for an ill mother, Kmart stock that went bad when the company went into bankruptcy and losing a job at age 66 and not being able to find another one that paid adequately.

"Things turn out very strange in life; you never know what will happen," she said.

Still, through the emotional hardships and financial disruptions, she—like many Americans—drew comfort from her home. Over the years, she watched its value rise, and subconsciously it provided a sense that she would be fine—even if other forms of saving lagged.

Now that retirement has arrived—earlier than she expected because of the job loss—she is discovering that tapping your home to cover basic living expenses is easier said than done. She is starting to envision her 70s and 80s, and wondering where cash will come from when her nest egg is locked into countertops, walls and floors that can't easily be turned into grocery money.

Aside from their homes, half of households within 10 years of retirement age have accumulated no more than $88,000 in retirement savings, according to the Congressional Research Service. That could translate into $653 a month for living expenses, if converted into an annuity.

After all, Polydoris says she still needs a place to live. And she would like to stay close to the area where she's spent most of her life and has family and friends. Consequently, even if she sells her home, she would need to use a significant portion of the proceeds to buy a replacement residence. She has looked around enough to know it won't be cheap. A multiyear housing boom has pushed home and condo prices to still-lofty levels.

On the face of it, she said, Baby Boomers are better prepared for retirement than generations before them because they have a higher net worth. But when she subtracted housing equity, she found that the median household has lower wealth than the previous generation.

When asked in surveys to think about their financial future, "people think of their wealth in housing," said Nicola Fuchs-Schundeln, a Harvard University professor of economics. But when they are asked about accessing that wealth for retirement, most say there is zero chance that they will sell their home.

"It's interesting," Fuchs-Schundeln noted, that people feel security from an asset, but also have no plan to tap it.

There is so much stupidity here that even I am overwhelmed.

Firstly, let me state flat out that this magical notion that Americans have had that somehow the home is going to pay for retirement has always seemed a little mysterious to me. Nobody expects a depreciating asset like a car to pay for retirement. So why a house?

The answer is leverage.

With leverage, you are magnifying gains (and also losses,) and it is true that a rising population and huge monetary inflation has worked out so far. But it is by no means a sure thing (as we have witnessed twice in the last 30 years, and are soon to witness again.)

Secondly, you still have to live somewhere so a home should be seen for what it is. A place to live, not a magic ATM that spits out $100 bills.

Thirdly, the notion that after living all your life in a certain place, you're going to move away to a different (cheaper) location seems, well, silly. What about your friends and family? What about your lifestyle? I can understand if you're forced to do it for fiscal reasons but for everyone else, well, this seems more than a little absurd.

Fourth, what happens if styles for houses change dramatically? Or that people have more or fewer kids? They may not like your house design, or they may demand far more energy-efficient houses. Fashions change; styles evolve. Anyone remember those godawful avocado kitchen instruments from the 70's that were all the rage? The granite countertops and stainless steel appliances are doomed to be the avocado kitchen instruments of 2017.

Fifth, what happens if that area is hit by a massive recession? Think Detroit or Rochester. Both were one industry towns, the former driven by automobiles, the latter by Kodak. To whom exactly are you going to sell your house when there are no jobs to be had?

Sixth, as we have pointed out, something ain't worth shit until you actually sell it. The fancy term is that you must "monetize" something otherwise its worth might as well be zero, or a "zillion bazillion" dollars. Without the monetization, you can claim anything for its worth but it's irrelevant.

Seventh, and this is one of the most subtle points.

The notion that all the Boomers can sell their houses and move to cheaper locations is absurd. If everyone does something, that something must fail. This is just elementary demand/supply in motion. Everyone in Chicago cannot sell and move to Florida. If they do, prices in Chicago must fall, and Florida rise. You can only make money by doing something that somebody else is NOT doing.

The corollary to the last two statements above is that stated prices are fictitious. Everyone cannot monetize at the same time. The supply would overwhelm demand. It has to be spread out in time, and time is the one luxury that retirees don't have. Normally, this doesn't matter because you roughly have a small fraction of people retiring each year, but the Boomer wave is larger than historical fractions, and they are singularly ill prepared for retirement (read the median savings above.)

Add to that the fact that median wages are falling in real terms (because of competition, offshoring, etc.) and you realize that prices must fall even further because the average worker cannot afford these absurd prices. And no amount of "financial engineering" can change this basic affordability equation.

In other words, if most homes are unaffordable for most people, what is the mechanism by which they can be "monetized"?

Until somebody answers that basic question, the above strategy is doomed.

Lastly, the reason this sorta kinda worked out for most people was that buying a house was a form of forced savings. Most people are singularly bad at saving. Given a choice, they will piss every cent away. By buying a house, they were forced to pay down the principal, and at the end of the term, many owned an asset free and clear. With the rise of "liberate your home equity", and "interest-only" loans, even this minimal amount of fiscal responsibility has vanished. They are now debt serfs, plain and simple, and they face a bleak future. A really bleak future!

Someday, this is going to be recognized for what it is. One of the stupidest ideas ever!