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.

Watch your wallet

That would be you.

Our spendthrift leaders in Washington will need to find more money to continue buying votes (no, I'm not cynical) and if you think they'll find it under the mattresses of the rich, as many of them assert, then you'll believe anything, and I've got a bridge I want to sell you.

One place they will surely look is the money you've been saving for retirement. Megan McArdle, the business and economics editor of The Atlantic, notes:

I'm not as excited about Roth IRAs as many people who write about consumer finance: I don't believe that the government is ultimately going to be able to keep it's hands off a pretty big pot of money. Getting a tax break now in your 401(k) or traditional IRA is guaranteed; getting a tax break in the future is not.

And those traditional IRAs?

I think that Congress is going to go after all of it. But Congress doesn't have to do anything special to get money out of traditional IRAs; it just has to raise income taxes. (401ks and traditional IRAs are taxed at ordinary income tax rates). Roth IRAs, on the other hand, represent a sizeable pool of tax-free assets. I also expect that at some point, Congress is going to at least attempt to claw back the tax deduction for municipal bonds.

Can't happen here?

It is of course true that tax-free retirement savings have a long history in the US. But they did in Ireland, too, and Ireland is now proposing to tax the bejeesus out of them.

Here's the punch line.

We can't all enjoy a personal free lunch, and the wealth of the truly wealthy is for many reasons not available to pay for all the benefits we are expecting. Nor can we simply ratchet up taxes on a working population which is shrinking at both ends as workers stay in school longer, and retire later. 

So I think that ultimately retirees are going to end up consuming less than they currently expect to. And given the political economy of it all, I expect the burden to fall more heavily on those who have saved than on those who haven't.

Here's how to understand Washington's interest in your savings: Why do people rob banks? Because that's where the money is.