Why you can't bank on your house anymore

If you think you can sell your house when you retire and live off the proceeds, think again.

A mortgage used to be a form of forced saving that gave you an (almost) free place to live in retirement and a little bit of value when you sold the house, says Megan McArdle, a senior editor for The Atlantic who writes about business and economics.

We didn't realize that a number of developments had been pushing up the price of homes: 

a.  The development of the 30-year self-amortizing mortgage, which enabled people to pay a much higher price for a given house than they would have in the era of 5-year balloon mortgages. 

b.  The baby boom, which increased demand for houses as they aged 

c.  The run-up in inflation in the 1970s, which gave (relatively inflation-proof) real estate a boost--and then the subsequent decline in inflation (and interest rates), which gave people the illusion of being able to afford more house because the up-front payments were lower. 

d.  More widely available credit, which let more people take on bigger loans 

e.  The increasing value of (and competition for) a small number of slots at selective colleges, which put a rising premium on houses in good school districts 

These trends gave people the illusion that houses were, in some fundamental way, an "excellent investment".  But they're risky in all sorts of ways: neighborhoods can get worse rather than better, local economies can stagnate, the style of your home can go out of fashion.  

Houses, she writes, are still pretty expensive by historical standards, as this chart from Barry Ritholtz shows:

Not a pretty picture. If you can't count on a steep run-up in asset prices to build up your retirement savings, McArdle says, that leaves you with one alternative: save a much bigger chunk of your income.