Homeownership a smaller part of retirement planning

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Dramatic drops in homeownership levels might indicate changing attitudes about the importance a house plays in retirement planning, local financial advisers say.

The homeownership rate in Colorado slipped to 65.9 percent in the first quarter of 2012, the first time the rate fell below the national average since 1998, said Colorado Division of Housing spokesman Ryan McMaken.

Nationally, the rate dropped to 66.1 percent, the lowest it has been since 1997. While the U.S. Census does not track rates by county quarterly, El Paso County has historically had lower homeownership rates than the rest of the state.

“I’m thinking there will be a lot of 50, 60, 70-year-olds who are going to have rental payments going into retirement,” said Michael Pennica, CEO of Pennica Financial Group. “A lot of people are going to have to increase their monthly expense projections.”

The homeownership rate in Colorado peaked at 70.1 percent in 2003. A lower homeownership rate means fewer people will have their homes paid off in retirement, which requires people will have to change how they plan for their golden years, Pennica said.

“Whether you’re 20 or your 70, you need a place to live,” Pennica said.

Apartment vacancy rates have slipped in succession with falling homeownership rates and are the lowest they’ve been in more than a decade, which makes sense because people who are not homeowners will have to rent, McMaken said.

He added that there were 20,000 new households in Colorado in the last year.

“It used to be that about a fifth of the households we added each year would be renters,” McMaken said. “Now we’re getting upward of 50 percent.”

He said there are several reasons for that. People who move from another city aren’t able to sell their old homes and don’t want to buy until they’ve offloaded the other property. They’re emerging from hard times in their parents’ basements or shared apartments and they aren’t financially secure enough to buy. Or they’re young and they don’t want to be tied down to a home.

The homeownership rate among Americans younger than 35 dropped to 36.8 percent, the lowest it has been in 18 years.

The shift in psychology away from homeownership means people will have to start planning for a retirement with rental expenses.

Of course, Pennica said he still believes people will want to own their homes and have them paid off by the time they reach retirement age. But delaying home buying will put people behind. Someone who buys a home with a 30-year mortgage and wants to retire at 65, will need to buy by age 35 to make it happen.

That could be tough for younger people who are suffering higher unemployment than the rest of the country, said Tim Watson, executive vice president with Strategic Financial Planners.

They’re starting their careers later in life and getting their savings built up later. They’re also less interested in owning right now.

“The myth that asset prices in real estate always increase has been debunked,” Watson said. “They don’t feel like there’s any rush to buy.”

And that’s not necessarily a bad thing, he said. Young people will likely benefit from being mobile and able to move for better-paying jobs. Being able to take a better and higher-paying job will probably pay off in the end.

“I think the psychology has changed slightly in that a lot of folks don’t want to lock themselves into a property they feel they need to stick with,” Watson said.

Since home prices are just now stabilizing, he said would-be owners are not missing out on any appreciation. They might as well stay mobile and save for a bigger down payment, he said.

That won’t leave young people behind the curve, he said. They’ll probably be making more money and have more in savings when they do decide to settle down and buy.

And the Federal Reserve has said it would keep interest rates near 0 percent until 2014, which means the advantages buyers have today will still be available in a year or two.

“Especially with interest rates being so low, we’re seeing a big uptick in 15-year mortgages,” Watson said. “Someone who wants to retire at 65 can buy at 40 or 45 and still hit that target with a 15-year.”

National experts have argued that the homeownership rate in the late 1990s and the early 2000s was unnaturally high and that rates between the 1960s and the 1990s stayed flat between 64 and 65 percent. It was reckless lending that allowed unqualified buyers to enter the market.

Young people have not historically been homeowners.

“I’m pretty sure we all knew 26-year-olds who were buying big houses during the boom,” McMaken said.

But that’s a little out of the ordinary historically.

Pennica said the people who will be hardest hit by the declining homeownership rate are not the ones who have decided to rent instead of buy for now, it’s the ones who went through a foreclosure.

“That’s a hard hit to their credit,” Pennica said. “It will be seven to 10 years before they can get a mortgage again.”

Those are people who wanted to own a home, paid too much, lost it and now they’re renting, he said. They will probably have to plan for making rental or at least house payments in their retirement.

And there’s nothing wrong with that, Watson said. It just means people will have to save more.