Center for Retirement Research at Boston College

The Wealth of Older Americans and the Subprime Debacle

ABSTRACT

This study explores the consequences of the housing price bubble and its collapse for the wealth of older households. We utilize micro survey data to follow the rise in home values to 2007, observing which households enjoyed home price appreciation and how they responded in terms of equity withdrawal. We then use the SCF survey data on wealth holdings from 2007 in combination with national price indexes to simulate the magnitude and distribution of wealth loss from the 2008-2009 financial crisis. The collapse of the housing market triggered a broad decline of asset prices that greatly reduced the wealth of all households. While older households mitigated their real estate and equity losses with relatively stable fixed-value assets and pension programs, no demographic group was left unscathed.

Prior to the financial crisis, our study and others had concluded that the current baby-boom cohort of near retirees were surprisingly well-prepared for retirement compared with similarly aged households over the past quarter century. Unless there is a strong recovery of asset values in the next few years, that favorable assessment is no longer true.

INTRODUCTION

In recent years a substantial number of studies have addressed the adequacy of the babyboom generation’s preparation for retirement. In particular, are they better off in terms of retirement wealth than prior cohorts of retirees? The general conclusion has been that the wealth accumulation of the boomers is equal to or greater than that of earlier cohorts. That finding is surprising in light of the repeated observation that American households are saving far less than in the past. However, a quick glance at the national wealth statistics of the Flow of Funds Accounts (FoFs) provides an immediate reconciliation because it highlights the extraordinary capital gains that were generated over the period covered by the studies. As illustrated in Figure 1, the past two decades stand out for the magnitude of capital gains in real estate and equity holdings that have been more than enough to offset the decline in household saving rates and pushed the aggregate wealthincome ratio to record high levels in 2006. The baby-boom generation was the primary beneficiary of that surge in asset prices.

However, all of this changed in 2008 when the bursting of the housing price bubble and the catastrophic implosion of the sub-prime mortgage market triggered a widespread financial crisis that destroyed large portions of household wealth. The FoFs report a $13 trillion (15 percent) loss of household wealth between the peak of mid-2007 and March 2009; and, as shown in Figure 1, the wealth-income ratio has basically fallen back to the levels of the early 1990s.

The primary purpose of this study is to explore the consequences of the housing price bubble and its collapse for the wealth of older households. Which households experienced a large rise in home values and how did they respond? Using longitudinal data from the Panel Study of Income Dynamics (PSID), we can follow the rise in home values to 2006 as well as the mortgage financing decisions of aged and near-aged households.3 The Survey of Consumer Finances (SCF) does not have a panel dimension, but it has included a set of questions about households’ housing finance decisions in each wave of the survey since 1995, and its information is as recent as mid-2007. Thus, we have information on which households enjoyed large home price appreciation and how they responded to this appreciation. While we do not have direct observation of the extent of wealth loss in the 2008 crisis, we can use the distribution of wealth and its components in the above surveys together with national measures of average asset price changes to simulate the likely magnitude of loss and its distribution among major socioeconomic groups.

We focus first on the aggregate measures of the rise in home values and changes in housing finance and the extent to which those changes are captured in the micro survey data. In the second section, we explore the determinants of mortgage refinancings and the extraction of home equity. The analysis is largely based on the answers to a series of questions in the various waves of the SCF and PSID. In the third section, we focus more broadly on the overall wealth position of older households and the effects of the collapse of housing and asset prices more generally.