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Q Could you answer a quick question about the housing bubble and the elderly? In your Nov. 28 column -- "Retirees wonder about home purchase: pay cash or get loan" you say: "It became conventional wisdom during the great credit boom of the 2000s that carrying a mortgage into retirement was just fine, maybe even smart. The tactic badly backfired on far too many elderly homeowners when the bubble burst."
My question: Why would just the bubble bursting on home prices by itself backfire, if their assets let them pay their mortgage as usual? Or maybe they had refinanced to cover new expenses, and now couldn't pay back the loan? What am I missing?
AIn an important sense you're absolutely right: The decline in the market value of a home shouldn't really matter so long as the retiree has sufficient financial resources to keep paying the mortgage. However, for many people carrying a mortgage payment into retirement can increase their sense of psychological and financial vulnerability -- with good reason.
For instance, it wasn't just the value of homes that dropped during the recent Great Recession. Stock market values plummeted. Most bonds tanked, too, with the important exception of fixed-income securities backed by the federal government, from T-bills to federally insured certificates of deposit. But most corporate bonds, as well as state and local government debt issues, fared poorly.
As a result, many retirees felt the need to cut back on their spending. They have less wealth to tap than before. A mortgage payment simply adds to the financial pressure. Owning the home outright is a huge financial relief.
In a sense the story of a home and a mortgage is really a tale about freedom of choice. In the heart of every homeowner at any age burns an intense desire to own their home free and clear. When homeowners are younger I'm wary of vastly accelerating mortgage payments to get rid of the payments as quickly as possible. The reason is that those homeowners are putting all their financial eggs in one basket -- a home. Their financial health largely depends on how that home performs and it increases their financial exposure to the local economy and job market. I prefer that younger homeowners focus on creating a well-diversified portfolio of cash, stocks and bonds -- as well as their home equity.
But when folks are nearing retirement the homeowner equation shifts. Getting rid of the mortgage improves the future retiree's personal financial safety net. It makes it easier to ride out the inevitable swings of the business cycle.
Chris Farrell is economics editor for American Public Media's "Marketplace Money." Send questions to firstname.lastname@example.org.