FREE NEWSLETTER
STOCKS, BONDS, CASH—and a house owned free and clear. For many, that’s the recipe for a financially successful retirement. Our homes represent a central pillar of middle-class status. With a paid-off mortgage, we have an affordable place to spend our old age.
Yet signing up for decades of house payments has become controversial for its high opportunity cost—what you give up to pay the mortgage. Has a home mortgage, with its long, slow road to payoff, fallen from relevance as a central element of retirement planning?
To be sure, it’s been a wild ride. During the George W. Bush administration, well-intentioned federal policies encouraged an expansion of the market for home loans. Bankers and builders responded. Home values rose as lending standards declined and increased demand met limited supply.
Rising home prices served as their own collateral. Borrowers with no cash found zero-down offers containing both a primary and secondary mortgage. The second note, called a piggyback loan, filled the role of a down payment. “No doc” loans replaced earlier underwriting requirements that stipulated borrowers must verify they had income sufficient to support mortgage payments.
These riskier loans were bundled and sliced into collateralized debt obligation (CDO) tranches, considered less risky than individual mortgages since the risk of default was diluted across many loans. These marketable securities also shifted the financial risks of lending away from mortgage originators and onto holders of the CDOs.
This created novel moral hazard for multiple parties, who weren’t subject to the risks they ran. Questionable gain-seeking behavior resulted, such as bankers churning out CDOs to inflate year-end bonuses. Ratings agencies compounded the risk miscalculation by labeling these toxic instruments as investment grade. Out of this came the Great Recession.
In the subsequent global reckoning, the plummeting value of toxic assets cut a path of destruction through the world economy. Many people lost their homes to foreclosure. Financial firms holding mortgages became insolvent, triggering a global liquidity crisis.
Housing prices dropped, in some markets by as much as 50%. Even traditional borrowers, many of whom had put tens of thousands down and made years of payments, found themselves owing more than their homes’ worth.
Some homeowners simply walked away, refusing to pay their mortgage. Others exited their housing debt with short sales—selling for less than they owed—which further exacerbated the crisis. Banks holding mortgages and collateralized debt obligations were endangered.
Many of my students at the time held underwater mortgages and wondered how to respond. Was it ethical to walk away?
Once burned, twice shy. Some now argue for an alternative lifestyle of renting forever. They want to find means, other than homeownership, to save for retirement and achieve financial prosperity. Still, nearly two-thirds of U.S. households remain homeowners.
With the high costs of everyday life, homeowners can be tempted to borrow against the equity in their homes, even when it means their mortgages may never be repaid. With high interest rates, the high initial cost of homes, and ready options for cash-out refinancing, why should a paid-off home remain a primary financial goal?
Perhaps it’s foolish to place such importance on owning a home. Questioning homeownership is common ground for young adults and retirees alike. Uncertainties increased in a post-inflationary era where home values have lately trailed inflation. Factor in the cost of property maintenance and the stress of servicing a mortgage, and homeownership can look unappealing.
Could the housing price boom be over? In some places lately, the interest rate on no-risk cash deposits has been higher than the annual increase in home values. People with working-class paychecks or living on retirement incomes are already stretched thin covering the costs of housing, food and transportation.
A mortgage can push aside many of life’s smaller pleasures. If that’s the case, why not opt for the smallest, cheapest housing possible?
Catherine Horiuchi is retired from the University of San Francisco’s School of Management, where she was an associate professor teaching graduate courses in public policy, public finance and government technology. Check out Catherine’s earlier articles.
Want to receive our weekly newsletter? Sign up now. How about our daily alert about the site's latest posts? Join the list.
Informative article. However you seem to writing as if buying vs renting is a choice. With the nationwide shortage of housing, esp in markets like Seattle where I live, buying is simply impossible for anyone except the wealthy. A couple of generations are no longer having the option of buying. We need to build a lot more housing to bring supply in balance with demand.
I agree. The options are limited for many people.
I worked in Seattle for two years once, almost bought an apartment. It’s a wonderful city with a difficult housing market, yes.
That said, and we see some tales in comments below, people of modest means still find ways to buy a home, if that is their primary financial aspiration. Many do so by moving from expensive cities to lesser places, leaving city jobs behind or (in the case, say, of Californians who work in the Bay Area but cannot afford to live there) taking on grueling commutes. Some buy terrible places (“handyman specials”) and spend decades to make them more livable.
Who is the “we” who will build more houses? And who is the “we” who make the rules about what kind of houses can be built, and where they can be built? (Never mind the “we” who believes they can “nudge” demand in the direction of their preference.) Our society has made some poor collective choices.
One such poor choice in my thinking is the K-12 model of “everyone goes to college” instead of using high school as years where many could choose to enter construction trades or learn how to start a small business and all should study at length how to contribute to the public good through civic participation. The negative consequences of the current curriculum are manifold.
All this collective trouble aside, at the end of the day we live as individuals. If my still-living-at-home kid were to ask me, I’d advise them to save two thirds of their take home pay now to set up the potential of a condo or house someday. (They save a bunch, but we don’t talk much about what they are saving for or when they will spend it.) Their cash flow doesn’t support a house payment, but it could support a third of a house payment or a half of a rent payment. A year of saving could result in a year of rent. Two years of saving could pay a year of house payments.
This is way too much careful planning for most 22-year-olds. But if a pattern is set now, I think by the time they are 30 they will be able to purchase a place of their own.
Retirees who locate to less expensive cities, or leave the US for other countries, they are responding as well to the outsized cost of housing. Most cities don’t seem to mind losing their retirees, but when the workers and families leave, the ripple effects cause elected officials to pay attention. But that seems insufficient to create the housing we need to make this less of a front burner problem.