Seductive

Conceived in the optimistic haze of a post-war world, raised amid continuous inflation, growth and halcyon burbs, Boomers were the best-educated, healthiest, most urbane, materialistic and narcissistic generation ever. It was all about them. Still is. And their houses.

And this is a problem.

More than half of these nine million people have less than $300,000 saved. At a median age of 53, trust me, that sucks. About seven in ten have no pensions. Life expectancy is pushing 85, even for cholesterol-reduced guys. So what the hell are they going to live on?

This is another reason why HouseAgeddon may await us. To a sickly economy, asset deflation, household and public debt, rising taxes and no jobs, you can add demographics. Several million couples in their sixties will have no alternative over the next five years but to liquidate their real estate.

Oh, they may toy with some other ideas, like one of those parasitic reverse mortgages. But that’s not much of a choice. For example, on a full paid-for $500,000 house, the maximum amount available would be about $145,000 – enough to live on for three years maybe. And the loan must be paid back when the house is sold or you croak. Meanwhile interest charges accrue at the rate of 4.5% – which will turn $145,000 boost into a $364,000 debt in twenty years. Isn’t compound interest fun?

No, the more likely choice of most will be to bail. And this is when the Boomer magic ends. By 2015 we could be mired in a property funk of biblical dimensions, coming out of a lingering recession and about to plunge into a ocean of new listings unleashed by stressed-out people with gray hair who still like Springsteen.

Of course, they should have sold last year. They should sell now. They should still sell in five years, no matter what the market nor how much money is left on the table. Residential real estate’s on its way once again to being just shelter. Not a substitute for working.

Boomers who miss this are screwed. The imbalance they will cause in the property market – coming at a time of real estate weakness – will cost them more than they now understand. Pensionless and without enough assets, they’ll be forced into an unfamiliar frugality which itself will drag on the economy.

And it’s all so unnecessary. A 55-year-old today who invests two hundred large in a balanced portfolio of sector ETFs, bonds, trusts and preferreds getting 7% will double that amount by age 66 (if the rate of return is constant) and have $775,000 at age 75. If the same cash were left in a house, it would be worth only what someone paid for it on a day of closing. That’s why homes are illiquid. Unlike financial assets, they don’t feed you.

And to those who say investing in such things is not guaranteed, of course it isn’t. But age is. And life’s long. The greatest risk now is not losing money, but running out of it.

And so a cautionary tale in Toronto, from blog dog Jenny:

A while back I wrote to you asking for strategies on how I could structure my own saving to help my parents – they’re 72 and 78, with little more than their CPP to live on, no savings, and I thought (until very recently) the equity that they’d built up in the house that they own. I’d hoped to convince them to sell the house, harvest the capital, and invest in dividend generating assets to supplement their retirement. On some level, I worried that they might not have enough, and wanted to figure a way to give their income even a little bit of a boost.

Silly me. It turns out that their house was mortgaged to the hilt ($580k mortgage, on $700k house = $3000mo payment to seniors with a combined income of less than $2000 a month) to pay for marble bathrooms and granite countertops – ostensibly to jack the price of the place up to sell it to greater fools, but somewhere along the way they got a little too comfortable, and stayed too long. Now it’s time to force a sale, but not before my sister and I have to step in, to cover the mortgage and a bunch of other bills to keep what little capital the folks have left in the house, until they can complete a sale, pay off their mortgage, and their other debts ($35k in fancy, store-bought credit cards!?!). It’s been a hellish few days for everyone concerned as my sister and I work to secure the funds, and consent of our spouses to bail our parents out, in the short term – only so that we can save them in the longer term.

The short term plan involves using lines of credit to cover their monthly payments until the house is sold now that the true extent of my parents’ incompetence became evident. It’s not a great plan, but better than my mother’s plan to go to a ‘private lender’ to cover her missed mortgage payments (at 14%, plus a $5000 application fee).

Garth, I offer this sorry mess as a cautionary tale for your readers. Normally the first freedom that children of doddering seniors must revoke is that of driving. In our case, clearly the first lost freedom is access to equity… and credit. At least no pedestrians were harmed, before the family stepped in.

Real estate is the emotional asset. The most seductive and enveloping. Like a jealous mistress, it blinds you to danger and cloyingly draws you closer.

Until you look down, and your pants are afire.