Cecily O'Connor
RedwoodAge.com

Turmoil in the financial markets isn't just hurting big banks. It will force many boomers to delay retirement.

Not only are they watching their nest eggs shrink on Wall Street, but they've been hit hard by falling home values.

US home values have dropped by $400 billion since bleak economic conditions surfaced in early 2007, according to a white paper from Principal Funds. The mutual fund company identified problems related to a decrease in home prices that affect retirement planning.

For boomers nearing retirement age, the value of their homes often accounts for a majority of total net worth, which makes them especially vulnerable to downward pricing pressure. 

Concern grew this week as stocks spiraled lower as the credit crisis took down two large US banks. That, in turn, stirred up worries among middle age investors about the health of their financial assets at a time when relief is no where in sight. 

'A Major Disruption'
Housing prices have been heading south since the spring of 2007 when they began to fall in certain urban areas, and then nationwide. Those problems resulted from careless mortgage underwriting standards, the use of aggressive loan repayment plans, and a strong dependence on continued double-digit house price increases.

As a result, any significant changes in either home values or Social Security "presents a major disruption to the retirement plans of many Americans, and negatively impacts retirement adequacy and preparedness," according to the white paper.

This "decreased wealth effect" is especially acute among people approaching retirement age who will now have to consider extending their retirement dates, it said.

A decline in home values is "important since this loss cannot be quickly recovered through stock market gains," according to the paper. Additionally, "home value appreciation typically occurs over decades, so recovering the equity that vanished will not be an overnight event."

For example, it would take at least 10 years to recoup a $25,000 loss on a house valued at $250,000, taking into account certain assumptions (see table).

Home Sweet Home
Home ownership produces strong sentimental effects, which can shape decisions people make about whether to tap their home equity and whether they want to continue working as they approach retirement age.

Since home ownership generally increases with age, many older people rely on their home equity as insurance against unforeseen life events such as illness or death of a spouse.

When US home prices peaked in 2006, there was plenty of equity at owners' disposal.

But for the first time in 63 years, owners' equity in household real estate has fallen below 50 percent, according to the Principal report, citing Federal Reserve data from 1945 to 2008. Rising mortgage debt is compounding the problem for many homeowners, especially older people who are paying off mortgage loans at a slower rate. 

Continue Into 2009
The financial crisis has begun to slow the broader economy, with banks lending less money and consumers cutting their spending. Many economists are now expecting the economy to slip into recession by the end of this year.

Recent data indicates that the housing market will continue to suffer steep price declines, which could last into 2009. More dire estimates predict a four-to-eight year recovery horizon.

As of May, house prices nationally were off 16 percent from the peak reached in the second quarter of 2006, according to the Standard & Poor’s/Case-Shiller Index.

Given the cloudy outlook, it's important to consider the current housing problem alongside other issues related to retirement planning, including longevity, asset allocation, health care availability and costs, withdrawal rates, and inflation, Principal cautioned.

Other factors such as reverse mortgages and death of a spouse may affect your outlook, too. As always, it's important to discuss your own circumstances with a financial planner.