Remember the concept 'Owning a piece of the American Dream?'  That goal you had when you graduated from college to eventually own your own home? 

Well, some recently released statistics suggest that, although the percentage of homeowners in our nation is at an all—time high, the preponderance of interest—only and home equity loans is creating a society of baby boomers that might never actually achieve this dream.  Maybe even more concerning is that these home 'lessees' don't seem to mind.  As reported by The Sacramento Bee:

"'Folks paying off their loans and owning their homes free and clear is becoming increasingly a dim memory,' said Keith Gumbinger, vice president of HSH Associates, a mortgage research firm in New Jersey. 'Someone in their 40s who has refinanced into a new, 30—year term has realistically signed themselves on for a mortgage until they are actuarially (likely to be) dead. It's the mortgage in perpetuity.'"

To be more specific, according to information compiled by Freddie Mac and The U.S. Census Bureau, Americans have been aggressively tapping into the equity in their homes the past four years at totally unprecedented rates.  As a result, the debt—to—value percentages for all age groups have been skyrocketing.

Of particular concern is what is happening within the soon—to—be—retired age bracket from 55 to 64—year olds.  Here, as of the data collected through 2003, the average homeowner still owes 24.5% of his/her home's value.  This compares to 16.1% just two decades earlier.

What this means is that rather than setting themselves up for retirement by paying off indebtedness, the first wave of baby boomers is increasing such liens.  Without a doubt, one would be hard—pressed to find a qualified estate or financial planner who would liken such behavior to sound economic thinking.

So, what's causing this problem?  Well, as mortgage rates have plummeted in the past several years to near record levels, while real estate prices have conversely escalated, Americans have taken advantage of this condition by removing more and more of the equity from their properties through new and ever—creative financing opportunities offered to them by banks and lending institutions. 

To be sure, much of the moneys accessed through such activities have made its way back into the economy through consumer purchases as well as additional real estate investments.  Fortuitously, as has been addressed by Federal Reserve Chairman Alan Greenspan in multiple testimonies in front of Congress the past few years, such purchases have played a pivotal role in the economy's recovery since the fourth quarter of 2001.

However, regardless of the economically stimulative impact, one has to question when we became a society of renters instead of owners.  Is this potentially just a logical extension of the auto lease boom that began in the '80's, picked up steam in the '90's, and has shown no discernible signs of abating? 

Regardless of the answer, it now appears that this same concept has morphed into the real estate market, creating a whole generation of homeowners who more closely resemble habitual lessees in as much as they never completely eliminate —— or in many cases even reduce —— the debt level on their properties.   Again from the Bee:

'Forty—five percent of homeowners who refinanced between early 2001 and the first half of 2002 pulled cash out, and 74 percent wound up with more years on their mortgage — six more years, on average — according to the most recent Federal Reserve household survey. Just 17 percent of those who refinanced chose to shorten the loan term, usually choosing a 15—year mortgage.'

Adding it all up, with savings rates at multi—decade lows and Social Security facing a crisis —— depending of course upon which political party you believe —— it appears that many Americans are mishandling their real estate debt with the same poor level of skill with which they manage the rest of their finances.  Certainly, this shouldn't surprise us, for citizens are likely just emulating the fiscal indiscipline of their elected officials in Washington as well as in state legislatures across the country. 

Consequently, as much as our economy has become dependent upon this new iteration of the 'Triangle Trade' —— in this case, rather than 'Molasses to Rum to Slaves', it's 'Appreciation to Loans to Purchases' —— the baby boomer is now similarly hooked.  In fact, as most of the soon—to—be—retired crowd is likely banking on selling their homes to purchase smaller, retirement properties down the road, with enough left over to meet the rest of their expenses, what happens if this equation ends up not working? Given the smaller cohort of buyers demographically following the peak of the baby boom, who exactly is going to be bidding on all these homes of the boomers for sale, as they move into retirement properties?

The formula for successful retirement used to be the reduction of recurring monthly expenses that affords one the ability to live on less income than while one was employed.  Given this, if baby boomers continue to have mortgage payments well into their sixties and seventies, unless real estate prices just continue to appreciate ad infinitum with nary a decline in value, how will they ever be able to retire?

Noel Sheppard is an economist and writer residing in Northern California.  He welcomes your comments at slep@danvillebc.com.