For decades housing was a buoyant force in our economy. Lately it has been a dead-weight in the lives of many who are in or who are approaching retirement. Their retirement portfolios are not generating enough income to pay the bills, and because of spotty employment, many are failing to make regular contributions.
A generation ago, home ownership was the respected platform for raising a family and when chosen wisely, it shortened the commute to good employment. Mortgage deductibility at tax time encouraged buying more house than was actually needed. Most homeowners believed the tradition of steady increases in home values would accumulate to an important part of their retirement nest egg.
But the conventional wisdom on housing no longer rings true. During 2003-2005 home prices rocketed upwards fueled by too-easy mortgages and by a few buyers making a fortune by flipping homes. Inevitably, home prices stalled in April 2006. Although still down 17% from that peak, they had been down more than 30%. Houses in some states remain deeply submerged – they are hostages in our stalled economy.
Non-performing mortgages led Washington to declare a “financial crisis” which it promised to cure with questionable bailouts, higher entitlements, and “shovel ready jobs” projects. Other political scams such as green energy loans, “Cash for Clunkers” and transferring the bondholders’ stake in GM to the autoworkers union were mayhem that helped push the stock market into a ravine from which it recovered very slowly. Dogmatic rhetoric, refusal to cooperate, and falling public approval caused Washington to be gridlocked and impotent. Although Washington is still not helping, at least it no longer takes credit for fixing the economy.
Since 2010, the Federal Reserve has been the only agency setting worthwhile policy and acting. The Fed bought bonds with both hands while keeping interest rates at zero. The buying program is called Quantitative Easing (QE). Treasury bill yields dropped from 5.17% (on June 30, 2007) just before the financial crisis to 1.64% (on Sept 28, 2012) during the QE program. The early stages of QE may have mildly boosted the stock market and stimulated the economy, but QE has not caused recovery in the housing market, and QE has damaged retirees dependent on income from investments and IRAs.
For decades, Americans who were in or near retirement parked their retirement funds in corporate or municipal bonds, or CDs, or real estate investment trust (REIT) equities. These traditional retirement vehicles produce higher yields than Treasury bills or common stock dividends. But the Fed’s zero interest rate policy crushed yields in the usual retirement vehicles, dashing seniors’ expectations for income.
Now the Fed is cutting back on QE, allowing bond prices to fall and interest rates to rise. For seniors, the good news is that higher interest rates in the future will eventually mean higher retirement incomes. The bad news is that unless held to maturity, today’s low-interest bonds could sharply decrease their nest egg’s value. Consequently, many are planning to sell off the bonds, CDs, and equities that are especially interest rate sensitive (e.g. REITs).
An extremely valuable planning parameter for seniors is knowledge of how much interest rates will increase and by when. The 10-year Treasury interest rate has jumped about 1% point since the Fed announced it would retire QE, and the Fed is about half way through halting QE. That could imply at QE’s conclusion that 10-year yields might be up another 1% point. Still that would be down about 1% from mid-2007. But, we cannot use simple math on interest forecasts — many factors determine rates.
Recent low mortgage interest rates would normally encourage a big rise in housing prices. Prices have recovered since the trough in 2009, but they are still below the peak in 2006, except in a few areas. Many homeowners are paying on mortgages that place them so “underwater” that they can neither sell nor take advantage of the lower mortgage rates. They are mired in stagnant housing markets.
When the home is no longer a reliable nest egg and a retirement portfolio earns next to nothing, many seniors have little choice but return to working through this disappointing period. At some point their home may become salable, and their retirement portfolio may earn a reasonable yield on the capital they have not yet spent. But they will not forget the unkind years of the financial crisis they faced after a lifetime of “doing the right things.
Alan Daley is writes for The American Consumer Institute Center for Citizen Research, a nonprofit educational and research organization. For more information, visit www.theamericanconsumer.org.