The residential housing market in the United States is finally starting to pick up steam after five years of decline. In many parts of the U.S., housing prices are still well below where they were in 2006 and 2007. The median national home value in April 2013 was $184,300, a far cry from their peak of $230,400 in 2006.
For Baby Boomers looking forward to retirement in the near future, financial considerations are of paramount importance, and for the majority of middle-class Americans, their primary residence represents more than two-thirds of their total net worth, according to Christian Weller, a professor at the University of Massachusetts.
For these people, that means a change in the real estate market puts them at risk of losing significant money. In fact, Weller found that is exactly what happened to middle-income Americans between 2001 and 2010, when their average total assets fell from $90,500 to $57,000.
So in an era of economic and financial uncertainty, what are Baby Boomers to do? Should they become (or stay) home owners, and enjoy the equity and stability that comes with it, or opt to become renters, and enjoy the lower costs that are associated with renting?
The first step a soon-to-be retiree needs to take is evaluating what their needs and goals are. In addition to financial considerations and questions, a prospective retiree needs to ask how much space they need in their home and how many people are living there, whether they see themselves moving in the near future, and what their needs are in a home.
From a financial perspective, ownership offers the potential for long-term appreciation, but also comes at a high initial cost, with land transfer fees, property taxes, maintenance, as well as mortgage and other borrowing costs.
Renting, conversely, typically is cheaper on a regular basis, with no property taxes or large-scale maintenance and renovation costs, and that lower cost offers renters the flexibility to take their saved funds and invest them, thus providing a high potential return.
However, volatility in the stock market exists, just as it does in the real estate market.
Although many financial experts say renting offers a potential for higher investment return compared to home ownership, statistics from the financial services market research firm DALBAR reports that the average individual investor only saw a 3.83% return on their stock market returns, primarily because many investors lack the self-discipline to wait out tough economic periods.
In other words, it’s often tempting to buy when a stock is high, and making headlines, and tempting to sell when it’s fallen out of favor.
One downside of home ownership, however, is that it lacks the flexibility of renting. Whereas a renter can, in most instances, simply give their landlord a 60-day notice that they wish to leave their home, selling one’s home is a significant investment in both time and money.
As a result, with all the uncertainty surrounding both real estate and stocks, the careful Boomer should consult their financial advisor and see what works best for them.