First, it should be said that not everyone has a problem, and that could be said about most generalizations regarding the housing market. "The housing market in Columbia did not boom, so the current trend is that real estate values are holding steady," says Cheryl Holland, owner of Abacus Planning Group Inc. in Columbia, S.C. "In fact, our two clients who are large-scale residential developers are having their best year ever. We did have a few clients who insisted on purchasing a second residence at peak prices in hot markets like Asheville, [N.C.], or the coast. Since we do not consider residences an investment asset, though, we never included these assets in the clients' retirement plan discussions."

Second-many advisors have already successfully indoctrinated their clients with Sestina and Holland's philosophy, namely, that their home should not be thought of or relied on as a retirement asset. "I can't think of a single client of ours who is doing something differently as a result of the current decline in housing prices," says Norm Boone, owner of Mosaic Financial Partners in San Francisco. "It's not likely to be a long-term phenomenon-although arguably housing prices needed to come down-and relatively few of our clients view their homes as anything other than a place to live."

Yet horror stories of underwater mortgages and double-digit depreciation are becoming more common, affecting clients' retirement in unanticipated ways.

Delaying Retirement To Work Longer
    Countering the common wisdom of many financial advisors, Larry Woolever, CPA of Partnervest Securities in Santa Barbara, Calif., says, "Except for the very wealthy, the value of the primary residence has a great deal to do with retirement decisions. Support for this position comes from the increasing popularity of reverse mortgages. Although there are many reasons why a borrower would find a reverse mortgage attractive, I think there is common consensus that at the root of most of the decisions is a desire for additional cash to meet a pressing need-a nearly universal decision faced by everyone exiting the workplace and facing retirement and a reduced cash flow future."

Woolever describes an almost generic retirement dilemma for many clients near retirement. "Debts and monthly bills don't magically disappear, and clients are living longer and worry about long-term care." Not surprisingly, he says, clients look at the equity in their residence as a possible solution to a seemingly impossible problem. "The decline in real estate values increases the stress level and pressure in making these decisions," he says. "Simply stated, a major resource of the client's financial strength has declined 10%, 20% or, in some cases, as much as 30%. That is devastating!"

This is the very situation faced by one of Woolever's client couples. "Both are in failing health. He is 72 and she is 65. He has an IRA that produces $8,000 yearly, they collect $22,000 in Social Security and he's presently employed, earning about $30,000 annually. Their major debt obligation is a $1,600 monthly [PITI] payment on a 6%, $117,000 mortgage. The residence was at one time worth about $400,000. Unfortunately, it would probably bring only $275,000 in the current market." On the positive side, says Woolever, the clients have saved $265,000 in nonqualified money and have a $100,000 second home that is debt-free and in which they can live.

What effect did the decline in these clients' home value have on their retirement plans? Woolever says they decided to postpone retirement. The man will continue to work as long as his health permits, they'll pay off the mortgage to save the 6% interest and free up the monthly payment, and they'll wait out the real estate market slump to reap a better selling price on their home. "Had their home still been worth the $400,000, giving them $253,000 in equity-$283,000 less an 8% sales commission-plus their $265,000 of savings, they'd have $518,000 in assets and about $26,000 of income,  nearly as much as the husband's wages," he continues. "Instead, selling today would leave about $393,000 to invest and about $20,000 per year at 5%. That amount of sacrifice was enough for them to decide to postpone retirement, continue working, invest what they have and hope for at least a partial recovery in the real estate market."

Ted Feight's mid-50s clients, Tim and Amy, planned to retire in 2006 or 2007 when they would have sold their Michigan home and purchase lakeside land in North Carolina on which to build a large retirement home. But the Michigan home market is in a full-blown recession and the clients' home has taken a heavy hit, says Feight, owner of Creative Financial Design in Lansing, Mich. "Since they have not retired and their current lifestyle is good, they've decided to continue working and wait for the housing market to come back. We've told them that we believe we're in a seven-year cycle-a cycle we've seen twice before over the last 35 years-and that we believe we're just entering the fourth year," says Feight, adding, "They seem to be OK with waiting and working another three years."

Delaying Continuing Care To Rebuild Equity

Whereas Woolever's clients were depending on their home equity to help finance their retirement, Delia Fernandez, owner of Fernandez Financial Advisor LLC in Los Alamitos, Calif., had a client who just wanted a temporary place to live and a little appreciation in home value before moving into a retirement community.

"This client came to me three years ago," says Fernandez."After having purchased a condo for $600,000 with an interest-only mortgage, she can afford at $3,700 per month PITI-an expense she shares with her [live-in] boyfriend/partner. But they only expected to live in the place until she followed him into retirement."
Now, says Fernandez, the client is looking at a June 2010 mortgage reset that will require her to pay down a fully amortized mortgage balance of $484,000- something she's not eager to do. They had hoped to sell, tap the equity and move into a retirement community with graduated care, explains Fernandez, but the client's home has lost $100,000 in value in the past year and a half and is still falling, so she's put those plans on hold.         "She shopped this month for a refinance to see if she could [keep her payments low], but lenders have labeled her neighborhood as one that's declining in value and, even though we're in one of the regions where the conforming rate has reset for 2008 to $729,250, several lenders have told her she'd have to pay $67,000 to buy down the loan and get the best rate."

And even if the client can get, say, an interest-only loan for seven years, Fernandez has pointed out that in seven years her condo may not be worth any more than it's worth now-and it could be worth less. "So I've asked her to consider selling the place and renting instead," says Fernandez. "She could probably rent a comparable place for $2,500 per month versus the $3,700 per month they're now paying, which would lower her monthly expenses [depending on the tax effects]."