The mortgage and housing meltdowns resulted in trillions of dollars in lost household wealth and caused homeownership rates to fall, especially among younger Americans, a trend that has only recently reversed as home prices have started to recover.
But while younger homeowners bore the brunt of the housing bust, the ripple effects of plummeting home prices and the foreclosure epidemic continue to affect older Americans as well, especially those with lower income.
For Americans 75 and older who have annual incomes of less than $50,000, housing-related wealth typically represents more than half of net worth, amounting to more than $100,000 in savings. For higher income seniors who have accumulated more wealth through financial investments the share of wealth due to housing is less, but still hovers in the 30 to 40 percent range.
Of course, housing is a lifecycle investment. So, the housing share of wealth is smaller for younger households, who in the early years of mortgages are paying larger amounts of mortgage interest and relatively smaller amounts of principal. It is for this reason, for example, that the mortgage interest deduction has greater value for relatively younger homeowners and recent homebuyers. But as mortgages are paid down, the housing wealth share generally increases as households approach retirement.
That means any fundamental changes in housing policy that discourage homeownership would have a serious impact on the finances of older Americans, who have spent decades building equity in their homes. The scale of those effects, as a share of total savings, would be proportionally larger for lower-income seniors.
The numbers also indicate what is at stake regarding the future of the tax code's principal residence gain exclusion, which provides up to $250,000 ($500,000 for married couples) of tax free gain from the sale of a primary home. As seniors sell their existing homes to relocate, downsize or move over to rentership, much of this housing wealth would be subject to tax as much as 23.8 percent.
Robert Dietz is an economist with the National Association of Home Builders (NAHB). Previously an economist with the Congressional Joint Committee on Taxation, Robert writes on housing and policy issues at NAHB's economics blog Eye on Housing. Follow Robert on Twitter at @dietz_econ. The information presented here does not necessarily represent the views of NAHB or its membership.