Unlocking home equity to fund retirement

Among people who retire and relocate, about 60% move to somewhere less expensive, typically unlocking about $100,000 of equity from a home they may have purchased decades earlier, the authors find. Such a strategy could be used by about 25% of all retirees over a ten-year period. 

“It’s a big deal,” says Kevin Khang, Ph.D., one of the paper’s authors. “It plays a very big role and, in some cases, the only role in people’s ability to have a secure retirement.” 

In research on retirement funding, the role of housing wealth has generally received limited attention. Khang and his coauthors Kate McKinnon, Ph.D., and Joana Rocha argue that the retire-and-relocate option merits closer consideration in assessing retirement readiness for many people.

Patterns of relocation around the time of retirement and throughout people’s lives come into focus through the authors’ analysis of millions of migration records from the U.S. Census Bureau’s American Community Survey and housing price data from the Federal Housing Finance Agency.

The figure below illustrates the sharp regional differences in how much of an average-priced home’s value can be extracted when a homeowner relocates upon retirement. While homeowners originating from most coastal states have the potential to cash out a significant sum, those from the Midwest and the South may need to inject principal or take out a mortgage to purchase an average-priced home in the new location. 

How big a difference can relocation make? As an example, the authors cite a hypothetical homeowner in Santa Clara, California, where the average house price in 2019 was $1,034,000. The homeowner relocates to Merced, in another county, where the average house price in 2019 was $266,000. The net difference of $768,000 is the amount of home equity the homeowner could have unlocked, not including potential mortgage and transaction costs. 

The paper focuses on two types of relocators: 

• “Lottery winners,” whose preretirement homes in booming housing markets appreciate at higher rates than the national average. They represented 31% of all migrations and unlocked an average home equity equal to 55% of their new house’s value in 2019.
• “Bargain hunters,” who shop for homes in low-growth markets where prices have lagged the national average. In 2019, they represented 19% of all migrations and unlocked an average home equity equal to 51% of their new house’s value.

When housing prices are on the upswing, lottery winners tend to make up a higher proportion of those retiring and relocating, the authors find. Bargain hunters, by contrast, tend to be more prevalent during housing market downturns and appear to prioritize unlocking home equity regardless of the market cycle. 

As a side benefit, living costs are often lower in a cheaper housing market, allowing each dollar to go further.

While many people intuitively have realized the retire-and-relocate approach works to their benefit, this has not been a focus of extensive research in the past. While it’s well-known that home equity represents a significant source of wealth for many American households, how to use it has been less clear.

“This informs the national discussion of retirement readiness,” Khang says. “We all know that housing wealth accounts for a large share of most people’s net worth. But we tend to not know much about what people do with all the housing wealth they have.” 

Naturally, housing wealth can fluctuate with changes in the relative standing of local housing markets. In the years since the global financial crisis, these have been synchronized to an unprecedented degree, with regional ups and downs of similar magnitude. The authors note that the retire-and-relocate approach may be less attractive if a desired destination appreciates more quickly than a current residence. But some adaptive behaviors, such as selling early and then renting in the preretirement location for a few years, may help mitigate such risks. 

The research ultimately shows that housing wealth need not be considered off-limits in terms of retirement planning, Khang says. “The fact that so many people are already doing it might nudge prospective retirees to consider all sources of wealth for retirement funding, including home equity. Having established a sharp range of estimates, the way we have done with this study, may also encourage policymakers and others to take housing wealth into consideration as they think about whether Americans are ready for retirement.” 

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