Boomers: 30% underwater

Many of those nearing retirement will have very little to live on thanks to an erosion of home equity.

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By Les Christie, CNNMoney.com staff writer

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NEW YORK (CNNMoney.com) -- What a turnaround for the American Dream!

According to a report released Wednesday, the real estate market bust and stock market declines have carved a huge chunk out of the assets of baby boomers.

So much home equity has been lost that 30% of boomers, aged 45 to 54, are underwater in their homes, according to "The Wealth of the Baby Boom Cohorts After the Collapse of the Housing Bubble. " The report, released by D.C.-based think tank the Center for Economic and Policy Research, also found that 18% of boomers aged 55 to 64 would owe money at close if they sold their homes.

The CEPR also found that people who were renting homes in 2004 will have more wealth in 2009 than those who were owners. That's true for all five wealth groups the study analyzed, from the poorest to the wealthiest.

"The collapse of the housing bubble, which led to the current recession, has already destroyed almost $6 trillion dollars in housing wealth for homeowners," said report co-author Dean Baker. "This reality is compounded by the recent collapse of the stock market. Many baby boomers will only have Social Security and Medicare to rely on in their retirement."

Three cases

Boomers between 45 and 54 have lost 45% of their median net worth, leaving them with just $80,000 in net worth, including home equity, according to the report.

Older boomers have fared marginally better. Those between 55 and 64 have lost 38% of their net worth, leaving them with $140,000. But this group is rapidly nearing retirement age and they have few working years left to make up the losses.

To come up with their estimates Baker and co-author David Rosnick analyzed the assets of boomer-headed families and projected their wealth through September 2009. They used data from the November 2008 Case-Shiller 20 City Price Index as well as the 2004 Survey of Consumer Finance - a survey of the balance sheet, pension, income, and other demographic characteristics of U.S. families put out by the Federal Reserve. The authors then factored in stock and housing market changes since then.

Baker and Rosnick presented their findings by income group under three scenarios they considered most likely: House prices remain at November 2008 levels (the latest data they had); house prices fall by 5% from November levels; or house prices fall by 15%.

In all three cases, the vast majority of these families will have lost a substantial portion of their net wealth compared with 2004.

"We've always boasted about how mobile we are as a society," said Baker, "but this can make us a lot less mobile."

A better deal

Peter Schiff, president of Euro Pacific Capital, an investment firm specializing in overseas investments and a noted bear on housing market issues, thinks there's a good chance home prices will continue their steep decline.

"Real estate has to be priced like any other goods," he said. "Home prices have to reflect the economic reality. You buy for shelter, not to make money. You don't need to own a house. I'm a perfect example."

He has rented for years and reports that the owners of his current home, after subtracting for property taxes and insurance, are receiving a cash-flow return on their investment of less than 1%.

"Real estate is overpriced if owners get just a 1% return," he said.

Baker pointed out that the stock market and home equity losses magnify the importance of safeguarding programs like Social Security and Medicare, the twin safety nets that could provide a higher portion of retirement support than many boomers originally bargained for.

"Now that tens of millions of families have just seen much of their wealth disappear," he said, "it is especially important to pursue policies that ensure retirement security for those on the brink of retirement." To top of page

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