The Underwater Retirement: Home Values Ruin Dreams
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Julie Halpert
The Fiscal Times
February 29, 2012

Charlotte Morse, age 62, purchased her home in Lincoln, California on the outskirts of Sacramento at the peak of the housing market  in 2005. The two bedroom, 1,531 square feet house cost $444,323. Now, according to estimates, the value is $257,500, a 42 percent drop, and Morse still owes $333,206 on the mortgage. Though she and her husband have entertained retirement plans to move to North Carolina, which has a lower cost of living, she knows that won't happen. "Our mortgage will most likely not be paid off in our lifetime," she says. "We're stuck in this mortgage nightmare."

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Morse is not alone. According to the University of Michigan Health and Retirement Study, 61 percent of homeowners ages 57 to 62 had not paid off their mortgage in 2010. Frank Stafford, a professor of conomics at the University of Michigan, has seen a big jump among those ages 50 to 65 still paying a mortgage, from 20 percent in 1990 to 30 percent in 2007. They "got themselves into a bad position before the crisis," he said. Many owe far more on their mortgage than their home is worth or find they cannot sell their homes.

The situation is thwarting the American Dream of many retirees, who had longed to cash in on their home's equity and move to a smaller home or retirement community. Instead, they're immobilized in a house that may be too difficult for them to manage as they age. "This creates a real challenge. They can't do what they want in their retirement years," says Rich Arzaga, a certified financial planner and CEO of Cornerstone Wealth Management, Inc.

Many boomers tapped into their home equity at the housing market peak. Among those ages 50 to 62, 30 percent borrowed against the value of their homes between 2001 and 2004. This means that they could experience a large decline in net worth, as much as 35 percent, according to Alicia Munnell, director of the Center for Retirement Research at Boston College, causing them to enter retirement with a "fragile balance sheet in time of depressed home prices," she said. Many will continue to work well into their retirement years. A November 2011 report by the Pew Research Center found that 66 percent of boomers ages 50 to 61 said they would likely delay retirement because of economic conditions; 23 percent said they planned to work until they are 70 or older; and 12 percent said they plan to never retire.

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This has altered the dream of retirement for many boomers. Arzaga, who practices in California, an area where the housing market has been hard hit, says having to work is a precarious situation, that is dependent on not only being able to find a job in a tough economy, but also remaining healthy enough to keep it, hardly a guarantee. He also says for some boomers, being stuck in their home means not being able to relocate to live closer to children and grandchildren.  

In 2009, only 55 percent of those who headed to an active adult community were able to use money from the sale of existing homes to finance the move, said Stephen Melman, director of economic services for The National Association of Home Builders (NAHB).