Credit Sesame discusses retirement challenges caused by purchasing homes later in life.
The typical American homebuyer is getting older, with recent housing market statistics showing that Americans delay home purchases until later in life. There are good reasons for this, but it is important to recognize how it complicates retirement planning. A decision to enter the housing market later should inform when people start saving for retirement and how much money they should plan on needing.
Housing affordability has taken a beating in recent years
In recent years, long-term demographic trends to purchase later in life have been exacerbated by immediate economic conditions, making it harder to afford a home. According to the S&P CoreLogic Case-Shiller US National Home Price Index, the average home price has increased for twelve calendar years. The index will likely extend that streak to thirteen straight years by the end of 2024.
Over the past ten years, the average home price has increased by 94.35%. Over half of this increase (a 53.54% rise) has happened in the past five years. In short, home prices have been getting more expensive at a dizzying pace. As if higher home prices are not challenging enough, the affordability of buying a home has been made worse by a sharp rise in mortgage rates.
Fall 2024 rates are still lower than their long-term historical average at 6.79%, but 30-year mortgage rates have more than doubled in the three years from late 2021 to late 2024. Over the ten years from the beginning of 2012 through the end of 2021, 30-year mortgage rates were mostly below 4%. Mortgage rates are now higher than consumers are used to.
Americans are buying homes later in life
How much do higher home prices and mortgage rates impact the housing market? As buying a home has become less affordable, more and more people have been forced to delay getting into the market. Recent statistics from the National Association of Realtors 2024 Profile of Home Buyers and Sellers reflect this delay:
- The median age of first-time buyers has risen to 38 years old. That’s up by 3 years from the previous annual report and the highest median age since the report was first compiled back in 1981.
- 26% of homebuyers paid for their purchases entirely in cash. This is the highest percentage in the report’s history. That high percentage of cash buyers reflects people’s aversion to paying today’s mortgage rates. Of course, amassing enough cash to buy a home without a loan takes much longer than qualifying for a mortgage.
It seems fast-rising home prices and higher mortgage rates have caused Americans to wait longer to buy a home on average.
Delayed homebuying impacts retirement saving
If Americans buy their first homes later in life, they should adjust how they save for retirement. Here are two ways retirement planning should adapt to the trend toward later home purchases:
1. People should begin saving for retirement earlier
Financial goals tend to fall along a timeline as people move through their careers. Buying a home has traditionally been a big priority for young adults, and once they’ve done that, they turn their attention to saving for retirement. The risk is that if people wait longer to buy a home, it also causes a delay when they start saving for retirement. This would be a mistake.
Retirement saving is a big job. It’s easiest if you spread it out over as many years as possible. Therefore, you shouldn’t wait until you’ve bought a home to start saving–especially if you’re putting off buying a home.
The years before you have mortgage payments may be an ideal time to start saving for retirement. It means people must balance two goals simultaneously–putting aside some money for retirement and saving for a down payment on a home.
The extra planning and discipline required to save for a down payment and retirement at the same time rather than one after the other can pay off in the long run. It can prevent you from delaying retirement indefinitely while you make up for the time you lost waiting to buy a home.
2. People should raise their retirement saving targets
People who buy houses later in life may have to save more for retirement. According to the Bureau of Labor Statistics, the average American spend on shelter peaks at $18,322 when people are in their late 30s and early 40s. It then starts to fall off as people approach retirement age. For people aged 65 and over, the average annual spending on shelter is $12,545–nearly a third lower than the peak.
A major reason these expenses usually fall later in life is that people pay off their mortgages. However, if people now wait longer to buy houses, that drop-off in expenses may not occur until later. This means people should plan on saving more for retirement to support higher annual housing expenses.
Without the near-term financial goal of buying a home, the risk is that young adults simply spend more. This would not only further delay their ability to own a home, but it could also jeopardize their ability to save enough for a comfortable retirement.
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Disclaimer: The article and information provided here are for informational purposes only and are not intended as a substitute for professional advice.
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