Quiz time. Is your home:

a) A place to live
b) A piggybank for retirement?

For most homeowners, the answer is “both of the above.” Decades of rising residential real estate valuation have brought Americans to view their homes not only as shelter, but an important asset that will help fund retirement. They’ve been encouraged by the financial services industry, which has aggressively marketed equity-to-cash products like home equity loans and reverse mortgages.

Even the current downdraft of the sub-prime mortgage crisis hasn’t hurt housing values enough to shake our long-term confidence in real estate as a retirement savings vehicle.

“Most people tend to think past is prologue when it comes to home valuations,” says Dowell Myers, a housing expert at the University of Southern California. “Real estate surveys consistently show that people always expect whatever trend has been in place to continue for another ten years.”

Trouble is, market trends don’t continue forever. And according to Myers, today’s tough real estate market will be insignificant compared with the long-term downturn coming in housing. If his projections are right, you’ll want to rethink the role of real estate in your retirement plan.

Myers is a professor of urban planning and demography at the University of Southern California who studies the impact of demographic trends on real estate. His most recent research study, “Aging Baby Boomers and the Generational Housing Bubble,” looks at future supply and demand for housing.

Please note Professor Myers’ use of the dreaded B word there. Why a bubble?

Stepping back and looking at residential real estate over the past three decades, Myers concludes that the giant baby boom generation created a huge bubble of housing demand. Declining demand—coupled with too many sellers—will pop it.

“The most important factor that pushes prices up is when you have more buyers than sellers,” Myers says. “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’ calculates that the ratio of seniors to working-age residents—the people who buy homes—will rise 67 percent over the next two decades. That will mean a protracted period of falling housing prices. While the study doesn’t forecast the actual price decline, Myers believes the downturn will start around 2010 and persist two decades or more.

But the downturn won’t be equal in all parts of the country—and it won’t occur at the same time, as the accompanying chart from Myers’ study shows. The chart depicts the years in which buyers will exceed sellers in each state. The Northeastern U.S., for example, will have a relatively high number of boomers ready to sell and move to warmer climates. But the pool of buyers will be limited not only by the smaller number of young people—but also by the region’s high home prices, which will put housing out of reach for many.

The Midwest also will have a high number of retiring boomers, but more affordable prices will create a somewhat larger pool of qualified buyers. “It could be a pretty big sell off in states that don’t have enough buyers,” Myers says. “The Northeast will be a basket case.”

Meanwhile Sunbelt states like Arizona, Florida and Nevada won’t be hit as hard, because an influx of retirement-aged homebuyers will buoy the buyer pool.

The upshot: If your retirement is still some years away, don’t make overly bullish assumptions about the value of your home in your financial planning. And be conservative about loading up your home with too much mortgage debt. “For people around age 55, nearly half of their housing value is in debt,” Myers says. “If prices drop 25 percent, you’d lose half of all your equity.”

And Myers does have some straightforward advice for would-be sellers: Don’t be in such a hurry. “The most practical thing is to ask yourself is, ‘Why should I sell?’ Why not work to make your community more amenable to older people who want to stay in place?” And Myers does have some straightforward advice for would-be sellers: Don’t be in such a hurry. “The most practical thing is to ask yourself is, ‘Why should I sell?’ Why not work to make your community more amenable to older people who want to stay in place?” Myers urges communities to help aging residents stay in place with services such as dial-a-ride, activity centers and home maintenance programs.

Beyond that, he’s an advocate for policies that would boost the buyer pool. “More immigrants would help,” he argues, “because it would increase the pool of homebuyers, especially in urban areas. And we need to improve our public education system, so that more young people enter the middle class and become homebuyers.”

RESOURCES: How would a housing bubble burst affect your part of the country? You can download the full details of Myers’ report here.

Tags | housing, real estate