Over-worked, over-housed and over-leveraged: Are American’s in love with debt & houses?Submitted by Financial Planning Solutions, LLC on September 6th, 2018
Our parents and grandparents used to hold a ritual of fire with their mortgages. Once fully paid off, they would burn their mortgage. Some would even hold a party to celebrate the event. The liberation from debt was celebrated. But nowadays, this is an unheard of event for several reasons.
Homeowners tend to move more frequently and leading up to the housing bust and financial market meltdown of 2008-9, homeowners believed that they could “catch up” to their larger mortgage because housing prices would continue to rise. Well, we know how that story ended and, for some, they are still dealing with the fallout ten years later.
Immediately after the housing crash, people began to save more and pay down their debts. But that trend did not persist for long.
With housing prices skyrocketing in many regions of the United States over the last few years, homeowners are continuing to have to pay more to acquire a home. Relatively low interest rates have encouraged this as homeowners and others have been comfortable taking on more debt.
Combined with a return to easier refinancing policies and loosened credit standards in some cases, homeowners have more housing debt than ever before. And older Americans are more likely to enter retirement with debt than in past decades.1
There are other factors at work, too. Prior to 2009 baby boomers were comfortable buying a big house in the suburbs with bonus rooms and a big yard. Now they’re older, the kids are gone (mostly) and they don’t want to have to take care of the big house anymore. In addition, Millennials don’t want long commutes and some don’t want a big yard because they’d rather be traveling than mowing the lawn.
Boomers are shedding their suburban homes and opting to be closer to or live in the city. Millennials are interested in some of the same housing but at lower price points. But in hot markets such as Seattle or Boston there has not been enough housing.
What does this mean for young couples and families seeking to settle down? Aside from high housing prices, they may need to look at alternatives in the short-term: buying a fixer-upper, living with parents, renting (see our blog about “Renting is Under-rated”), or waiting until the market cools off and more supply comes on the market.
On the last point, home buyers forget that housing, real estate and home construction are cyclical businesses—they go up and down over time. As someone who currently is having a kitchen remodeled, I am wishing that we did it back in 2010 when lots of contractors were looking for work and bidding more competitively than today. Housing prices were a lot lower during the recession, too.
Now, I’m not saying that you should wait for the next recession, but it is one option that no one is talking about.
Worried about your big mortgage? Concerned about high housing prices? Give us a call; we’re here to help.
1 Lusardi, Mitchell and Oggero, “Debt and Financial Vulnerability on the Verge of Retirement,” September 2017, Pension Research Council Working Paper, www.pensionresearchcouncil.org
Financial Planning Solutions, LLC (FPS) is a Registered Investment Advisor. FPS provides this blog for informational and educational purposes only. Nothing in this blog should be considered investment, tax, or legal advice. FPS only renders personalized advice to each client. Information herein includes opinions and source information that is believed to be reliable. However, such information may not be independently verified by FPS. Please see important disclosures link at the bottom of this page.