Americans Retirement Plans Are Crumbling

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Interest rate spikes have unexpectedly kept home prices high due to limited supply, as homeowners with low mortgage rates are reluctant to sell. This situation has significant implications for retirement plans, as homeownership is a key wealth-building vehicle for many Americans. The current high costs of buying homes push people towards renting, which lacks the long-term financial benefits of homeownership, potentially impacting future retirement savings and financial stability.

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Transcript:

Austin, interest rate spiking has had, let's face it, incredible and in many ways unexpected impacts on the real estate industry at large.

Virtually every best guess was that home prices would collapse as real estate, or sorry, as interest rates rose, but the opposite has appeared true.

So the question is, what is the situation that's going on?

How sustainable is it? And what are the knock-on effects for retirement plans?

Yeah, this has been a completely unexpected outcome.

And we're going to draw a line here between real estate and retirement.

What's the connection? You'll see in a moment.

But this has been a completely unexpected last two years.

Rates spike, which makes borrowing more expensive.

And the smart money, virtually everybody agreed that because this makes borrowing money and therefore buying a home much more expensive, that home values would have to collapse to reflect these higher payments.

But opportunity costs have kept home prices elevated.

We recently saw some data from Redfin just yesterday that home prices hit yet another high.

And the answer is limited supply.

And in short, no one wants to sell their home if they've locked in a 2% to 4% mortgage if it means going to buy a new one with 6% to 7% money.

So unless current homes on the market have a dramatically reduced price to reflect that higher cost of debt, the opportunity costs are shifting is way too high.

So because no one wants, but then there's a catch 22 where, because people have these low mortgages locked in, there's basically no inventory because they're not putting anything on the market.

So the laws of supply and demand have held true here.

And with that limited supply, but still high demand, you know, people always have to move, whether it's relocating for family or work.

So there are some sort of forced moves out there, but there's not a lot of inventory.

Therefore, prices have remained high despite high interest rates.

Unfortunately, this may actually be negatively affecting Americans' retirements. Here's how.

So U.S. homeowners have, on average, a net worth that's 40 times higher than renters.

Now, some of this is a self-fulfilling prophecy. If you're wealthier, you can buy a home.

But the truth is that owning a home also can contribute to your wealth because it creates two things.

It creates a forced savings vehicle in the form of slowly and consistently building equity, and it puts a ceiling on your housing costs.

While it may be more expensive to buy a home today, it means that in five years, seven years, 10 years, the cost of living in that home is roughly the same.

While inflation continues to hit rental rates, it becomes more and more expensive.

Unfortunately, we've talked about if homes are too expensive today to purchase, people will shift to renting.

And currently, renting is cheaper in all of the major U.S. cities.

So today, the rational decision is to rent.

But that removes what we just talked about, the forced savings vehicle that many homeowners experience and the ceiling that gets placed on housing costs by buying a home and locking in your mortgage rate.

So again, it might be a rational decision today to become a renter, but if people continue to do that, they might be losing one of their best vehicles to save for retirement.

Now, measured over decades, the reliable wealth builder that homeownership does create, it might no longer be in the cards for people.

By elevating the cost of homeownership today with high interest rates and limited inventory, it removes the single largest pillar of wealth building that many millions of Americans get to count on for their retirement.

So, you know, unfortunately, you know, when you couple this with some of the other things we've discussed, like the erosion in Social Security and looming budget shortfalls, you know, the loss of equity building in retirement, it might just be simply out of reach for many Americans.

Yeah, Austin, it's a really interesting situation.

You know, I do look at if you're a retiree and you're enjoying some of the rates that you're getting on many treasuries in excess of 5% right now.

If we see the Fed cut rates, that's going to go down.

But at the same time, it's going to lead likely to rising home prices even more than they are today.

So if you're in a situation also with a home where you might be looking to downsize in retirement by holding your house, you might be able to get appreciation that would potentially net against lower returns from some of your fixed income.

So I think there's a lot of factors to consider with how real estate can impact retirement.

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