08/30/2009 05:12 am ET Updated May 25, 2011

Boomers and Housing: A Symbiotic Relationship Unravels

When the housing market was soaring, many baby boomers thought of their homes as piggy-banks that could be cracked open in retirement to finance retirement.

High housing prices would allow us to leverage equity to finance our lifestyles, buy second homes or pay entry fees into retirement communities. That thinking was encouraged by the financial services industry, which aggressively marketed low-interest mortgage debt and equity-to-cash products like home equity loans and reverse mortgages.

But the piggy bank was smashed when the housing market crashed. And today's high unemployment rates, sagging incomes and rising foreclosure rates make it unlikely that we'll see a strong rebound anytime soon in housing. True, the widely-watched Standard & Poor's/Case-Shiller home price index released this week showed U.S. home prices rose in May on a month-to-month basis for the first time since July 2006. But that shouldn't be taken as a sign that the market is going to rebound to pre-crash levels anytime soon. At best, the Case-Shiller index hints that we may have found a bottom in housing. Maybe.

To be sure, the housing crash has caused pain for every American demographic group. But older Americans have the greatest exposure to real estate. Consider:

--Seventy-nine percent of Americans over age 55 own their own homes, compared with a national median ownership rate of 69 percent. As prices soared during the bubble era, boomers took on larger mortgages, and a greater percentage are now carrying mortgage debt well into their 60s than ever before.

--Home equity accounts for one-third to half of all net worth for older Americans; the only larger source of household wealth is Social Security. (Despite all the buzz about the stock market's crash, housing actually impacts a much larger group of Americans, simply because home ownership is spread much more evenly across income groups than equity investments.)

-- 30 percent of Americans age 45 to 54 are underwater on their mortgages, according to one study--that is, they owe more than their homes are worth, and would need to bring cash to a closing.

Warning signs were flashing in the housing market well ahead of the crash, due to basic laws of supply and demand. Baby boomers have been a key driver of housing demand over the past several decades due to our generation's extraordinary size. Now, we constitute an enormous group of potential home sellers as we age and begin to sell homes in order to downsize or move.

But boomers need to sell to a smaller, less affluent pool of buyers. "The most important factor that pushes prices up is when you have more buyers than sellers," says Dowell Myers, a professor of urban planning and demography at the University of Southern California. Myers has been pointing to a huge sea change in the ratio of buyers and sellers that will put downward pressure on housing values over the next two decades.

"The baby boom generation has pushed up housing prices over the past three decades, as they steadily moved up the ladder and bought housing. So people think the last three decades are normal. But at some point boomers will start to cash out."

Myers thinks the buy-sell ratios could be improved if the rate of immigration to the U.S. were to increase significantly, creating greater demand for housing. Likewise, echo boomers -- the children of baby boomers -- could have a positive impact as they come into their prime home buying years -- if housing becomes sufficiently affordable.

While prices have been plunging, the affordability gap remains sizeable, because median incomes of first-time home buyers have been in a long-term, secular fall, dropping 15 percent since 1976. Before the crash, buying power was propped up by liberal bank lending policies that have now largely been curbed. That means echo boomers and immigrants aren't likely to ride to the rescue of housing without a general pick-up in the economy -- and even then, prices aren't likely to recover to pre-crash levels.