Rising interest rates and a housing supply crunch have led to a housing affordability crisis in many areas of the country. And that can impact your ability to save for retirement.
The housing payments needed to buy a median-priced home reached $3,000 a month in March 2023, according to the State of the Nation’s Housing 2023 report from Harvard University’s Joint Center for Housing Studies. This figure includes mortgage, insurance and property tax.
In addition, the estimated income required to own a median-priced home hit $117,000, according to the report.
With a limited supply of homes and steeper prices for those that are available, you may need to adjust your budget if you are looking to buy a home. As you look ahead, the housing crisis could impact your retirement savings in several ways. You may find you have:
- Less opportunity to save for the long term.
- Fewer opportunities to build equity.
- Greater costs of living.
- Higher levels of debt to pay off.
Less Opportunity to Save for the Long Term
If a significant portion of your income is tied up in your home, there could be less to stash away for retirement. When you retire, you might have to adjust your budget and lead a lower-cost lifestyle. This could be a disappointment, especially if it means you have to cut back on travel or other hobbies.
To reduce your spending on housing now, it may be worthwhile to look for a smaller home or one needing some work that you can fix on your own. “Some housing programs and nonprofit organizations offer opportunities for individuals and families to contribute their labor toward building or rehabilitating affordable homes,” says Ziad Abdelnour, president and founder of Blackhawk Partners in New York City. “This can result in reduced housing costs and the satisfaction of being actively involved in securing affordable housing.”
Another solution is to take on an extra job, perhaps part-time or remote work. This way, you can save the earnings and put them toward a down payment. Or you could put more funds into a retirement account, such as an IRA. This would allow you to balance both homeownership and a long-term savings strategy.
Fewer Opportunities to Build Equity
In affordable housing markets, a worker might buy a home and pay off the mortgage by the time they retire. They can then sell the home and buy another without debt. “Another option would be to sell your home and move to an area that is less expensive in property values, property taxes and (homeowner association) fees,” says Mark Charnet, founder and CEO of American Prosperity Group in Sparta, New Jersey.
However, this strategy can be difficult in areas where home prices are rising rapidly. If you’re unable to purchase a home during your early working years, you may have to rent for longer. Buying a home later in life could mean less time to pay off the mortgage before you retire. Renting for long periods might lower your chances to build equity that you can access later in retirement.
Greater Costs of Living
In areas with steep home prices, you might find that costs related to food and entertainment are also high. The overall effect of rising prices could mean a stretched budget in retirement. In such a case, you might find you have to put all your income toward living expenses from one month to the next.
If you’re able to relocate, consider searching in a less expensive region. “I recently worked with a client who was unable to afford a home in a high-cost city,” says Joshua Martin, owner of Atticus Home Buyers in the Milwaukee area. “We explored different neighborhoods and found a more affordable area that still met their needs.” This lowered their monthly expenses and gave them more cash to put toward other costs. “They were able to save on housing costs while continuing to contribute to their retirement savings,” Martin says.
Higher Levels of Debt to Pay Off
If you decide to buy in an expensive area, you may have to take out a mortgage that is larger than you expected. You might also have a higher interest rate attached to the debt.
If possible, “it would be wise to pay down a high interest rate mortgage by making extra monthly payments or investing into a series of quality mutual funds at least monthly,” Charnet says. Working to eliminate housing debt could free up funds later in retirement, and prioritizing investments might provide additional streams of income in the future to help support your next stage of life.
